Macroeconomic Performance Flashcards
Potential Conflicts & Trade-offs Between Objectives
(generally in the short run)
Growth vs Inflation: Growing economy likely to experience inflationary pressures on price level
- Especially true when there is positive output gap & AD increases faster than AS
Growth vs Current Account: During periods of growth, consumption is high
- High marginal propensity to import, more spending on imports
- Worsening of current account deficit
- However, export-led growth (e.g China) can run a current account surplus & have high levels of growth
Growth vs Gov Budget Deficit: Reducing budget deficit requires less expenditure & more tax rev, would lead to fall in AD, however will be less economic growth
Growth vs Environment: High rates of growth likely to result in high levels of negative externalities, (e,g pollution, non-renewable resources)
Unemployment vs Inflation: Short run trade-off between level of unemployment & inflation rate, illustrated w/ Phillips curve
- As growth increases, unemployment falls due to jobs being created
- However, wages increase, can lead to more consumption & increase in price level
- Extent of trade off limited if supply side policies are used to reduce structural unemployment, which will not increase average wages
Macroeconomic Objectives
Macroeconomic Objectives: Objectives of the gov that measure macro performance, importance of each objective changes over time
Economic Growth: UK long run trend is ~2.5%
- Gov aims for sustainable growth in long run
- In developing economies, gov may aim to increase economic dev. before growth, improving living standards, life expectancy & literacy rates
Minimising Unemployment: Gov aims to have as near full employment as possible
- Aiming for unemployment rate of 4%
- Labour force should be employed in productive work
Price Stability: Inflation target is 2%, measured with CPI
- Aims to provide price stability for firms & consumers, helps make decisions in long run
Stable BOP on Current Account: Gov aimS for current account to be satisfactory, so no large deficit, near to equilibrium
- BOP equilibrium means countrycan
sustainably finance current account, important for long term growth
Balanced Gov Budget: Ensures gov controls borrowing, so national debt does not escalate
- Allows gov to borrow cheaply in future should
they need to, makes repayment easier
Greater Income Equality: Income & wealth should be distributed equitably, so gap between rich & poor is not extreme, fairer society
