MACRO - 1. introduction ✅ Flashcards
what are the four main objectives of the government?
- STABLE PRICE LEVEL
- HIGH EMPLOYMENT/ LOW UNEMPLOYMENT
- SATISFACTORY BALANCE OF PAYMENTS
- ECONOMIC GROWTH
what is inflation?
a sustained rise in the general level of prices
how is inflation measured?
the annual rate of change of the Consumer Price Index (CPI)
(index of costs of goods and services to typical consumer)
what is the ideal inflation rate?
2% is the bank of england target but a low percentage of inflation keeps the government happy
how are prices stable?
for prices to be stable, inflation rates should be zero
what is the best situation for the country in terms of employment?
the more people who are working rather and paying tax, rather than drawing social security is better for the economy
how is unemployment measured?
the claimant count is the older measure of unemployment
the ILO (International Labour Organisation) is used for a more realistic count
those counted must be out of work, physically able to work and looking for it and actually claiming JSA
what is the satisfactory balance of payments?
this records all flows of money into and out of the uk
its split into the CURRENT ACCOUNT and the CAPITAL AND FINANCIAL ACCOUNTS
how does the current account impact the economy?
the CURRENT ACCOUNT is the most important as it records how well the UK is doing in its exports of goods and services relative to imports
where imports EXCEED exports this is a current account deficit. Japan has the largest surplus in the world (exports greater than imports)
what are disadvantages of a current account surplus?
can make the economy dependent on export markets for jobs, unreliable
UK tends to be in deficit although during covid fluctuations occurred
how is economic growth measured?
rate of change of real GDP (gross domestic product)
GDP is a measure of the annual output of an economy (the value of what we produce in the UK economy)
what are any additional objectives?
reducing inequality is said to be a fifth
environmental protection is also an increasing part of government agenda
which policies do the government use to achieve the objectives?
- fiscal policy
- supply side policy
- exchange rate policy
- monetary policy
what does fiscal policy involve?
the use of government spending, taxation and borrowing to influence both the pattern of economic activity and also level of growth and demand, output and employment
expansion in fiscal policy - increase in government spending adds directly to demand
what does monetary policy involve?
the use of interest rates (cost of borrowing, reward of spending) to control the level and rate of growth of demand in the economy
interest rate decisions made by the MPC (Monetary Policy Committee)
lower interest rates = increase in consumer and business spending which both increase GDP but can cause inflation
