Macroeconomic Objectives Flashcards
Why are governments involved in the economy?
So as to manipulate the economy to improve its economic performance
What are the four variables of macroeconomic objectives?
Economic growth, Unemployment, Inflation, Current Account on the Balance of Payments
What other macroeconomic objectives are there?
Government budgets, the environment, and income inequality
What is the difference between economic growth for different countries?
For low and middle income countries like China, annual growth rates can reach 10%. For high income countries like UK, annual growth rates reach 2.5%
How can high rates of growth be achieved in low and middle income countries?
Moving large numbers of workers from low productivity agriculture to higher productivity manufacturing.
Using modern technology to increase output per worker
Why do high income countries struggle to have high economic growth?
High income countries have been through the industrialisation process and are the forefront of technological developments.
These countries also face a rapidly ageing population where the worker numbers are falling
What are the average economic growth for low and medium income countries and high income countries?
10% for low and medium income countries
2.5% for high income countries
Why does the government want unemployment to be as low as possible?
It means less people on benefits. The government keeps benefits low to make benefits seem less appealing which prevents people from getting no work
Why is it impossible to have 0 unemployment?
There is always frictional and seasonal unemployment
What is frictional unemployment?
Frictional unemployment is the time in which people are looking for jobs are unemployed: this typically accounts for 5% of unemployment
What is seasonal unemployment?
Seasonal unemployment accounts for jobs that are only available during certain seasons
How have UK unemployment rates varied to the modern day?
In the 1950s to 60s, unemployment rates were at around 1.5%
Over the lats 20 years it has increased to 4.8%
Nowadays, 5% would be an achievement
Why does the government want to increase employment?
Higher employment should increase tax revenues and reduce welfare benefits to the unemployed and those on low income
What level do central banks and the government want inflation at?
The target is around 2%. This is low but positive inflation. High inflation is a fear because the inflation may increase further
Why do governments want inflation?
Governments want inflation to be maintained so as to drive the economy
What is deflation linked to?
Recession and low or negative economic growth
What do government’s aim for with the balance of payments on current account?
Governments aim for the current account to be broadly in balance over time. This means an equal amount of money flowing in to the money flowing out
Generally, what are do the balance of accounts say about an economy?
A current account that is persistently in surplus are seen to be a ‘strong’ economies
A current account that runs persistent deficits are seen to be ‘struggling’ or ‘weak’ economies
This is general and not always accurate
Why are large current account deficits dangerous?
If borrowers in these countries reach a point where they can no longer repay their loans, there will be an economic crisis and a sudden fall in GDP
Argentina 2001, Greece 2009
What is a government budget?
A plan to allocate the money the government has on public services such as education, healthcare, and transport
What are the 3 types of budget?
Balanced Budget - Government spending and revenue are equal
Budget Surplus - Government revenue is greater than spending
Budget Deficit - Government spending is greater than revenue
What is national debt?
The sum total of all outstanding government borrowing where continued deficits lead to higher national debt
What is unsustainable fiscal deficits?
Where fiscal deficits have grown to over 10% of GDP and are sustained over the long term, governments have to borrow more than they can expect to pay
What are sustainable fiscal deficits?
Where fiscal deficits can rise to levels similar to 40% over the short term as the fiscal deficit can be reduced to more manageable levels over time
What do economists disagree on about fiscal deficits?
Economists disagree on the rate at which fiscal deficit should be cut: immediate or slow.
Immediate cut may result in negative economic growth and unemployment
Gradual cut allows the economy to grow faster, leading to quick rebound tax revenue and fall in benefits
What are government’s priorities for the environment?
Businesses always set up from government encouragement because they promote economic growth. However, the government also wants sustainability for growth and development
What are the two groups of economic thought?
What are there differences on the market?
Neo-classical economists believe in a market free of government intervention
Keynsian economists believe the government must intervene
How does the government use tax to tackle income inequality?
The government increases taxes on higher earners and businesses to redistribute the income. Tax bands are created to group incomes into particular tax levels each of which are taxed differently
What are the knock-on effets of different tax bands?
This can lead to social inequality and consequential strain on the government
What is a free market?
Where the government plays a small to no role in the market. It is therefore dominated by private businesses which leads to a greater number of richer people
What do economists argue against income distribution policies?
They tend to argue that inequality is positive because it increases incentives to work and to take economic risks. This would increase economic growth rates, raising incomes for all in society
Why do economists argue for income distribution policies?
They tend to argue on the principle of fairness that everyone in society should have access to a certains standard of living. Governments need to intervene to reduce inequality with public services. Left-wing economists say inequality is uncorrelated to economic growth
What is CIP?
Consumer Price Index. Acts as a measure of inflation
