Measurement of Macroeconomic Performance Flashcards
What are the main objectives of government macroeconomic policy?
Economic growth
Unemployment
Inflation
Balance of payments
They are used to measure national economic performance, hence the basis of objectives
What is economic growth?
It measures rate of change of a country’s output using GDP (calculating the sum of a country’s output over 1 year). Pursuit of economic growth is seen as a crucial goal of macroeconomic performance.
the increase in the real value of goods and services produced as measured by the annual percentage change in real Gross Domestic Product (GDP). Economic growth is also defined as a long-run increase in a country’s productive capacity / potential national output.
What are the benefits of economic growth?
- Job creation
- Rising incomes
- Improved standards of living
- Improved international competitiveness of the UK economy
- Multiplier and accelerator benefits
- Lower government spending on job seekers allowance and associated benefits
- Improved confidence of - businesses to invest and consumers to spend
- Tax revenues are likely to increase allowing the government to reinvest in infrastructure or spend on public services
Why is low unemployment a policy the government pursues?
Represents a waste of resources. High unemployment is an indicator of poor economic performance.
What are the benefits of low unemployment?
- High consumption and AD
- Higher incomes
- Improved standards of living
- Higher tax revenue for government
- Lower government spending on unemployment related welfare
- Improved productivity of UK economy
- reduced poverty
- society benefit
why is full employment not an achievable?
Will always be people moving between jobs or seeking work post education so low unemployment becomes the default target.
What is inflation?
The rate of change of average prices in an economy as measured by the consumer price index (CPI)
Why is a controlled inflation rate a policy the government pursues?
Inflation affects the value of money in your pocket High inflation damages the real value of money and erodes spending power.
Hence target inflation remains at 2% as the government want to achieve price stability. +/-1%
What is the balance of payments?
Measures the UK’s record of economic activities with other countries. We are concerned with imports and exports in particular.
What is the desired objective on the current account?
If exports > imports = surplus
If imports > exports = deficit
Because Deficits have to be funded, a surplus or equilibrium on the current account is desired.
How much does balance of payments matter?
A deficit on the account in terms of the UK’s trade in goods is offset to a degree by a surplus in our trade in services.
The UK had a sustained and persistent deficit on the balance of payments and received little attention from successive governments.
Why does the balance of payment matter?
- a high level of imported goods might be seen as negative but it provides consumers with a wider choice of goods which may be of higher quality and lower prices.
Firms benefit from cheap, high quality imported raw materials which reduce costs, either enhancing profits or lowering prices further for customers.
Economist view a deficit on the balance of trade overall as not detrimental to the wider economy.
What would government investment in education and training result in?
More skilled workers who are more productive and produce higher quality goods and services. These can be exported potentially at competitive prices which may improve the balance of payments.
This is a component of AD, greater economic growth will occur which may create jobs and lower unemployment. Supply side investment.
What would occur if the BoE consistently meet its 2% target?
- Will give firms more confidence to invest.
- higher capital spending will boost long term productive potential, assisting unemployment and enhancing the competitiveness of UK exports and the balance of payments as a consequence..
What is an example of a potential macroeconomic policy conflicts when the government wish to lower unemployment?
- consider a government wishes to lower employment
- it may increase G so AD shifts tight to AD 1
- this increases RNO and creates jobs as the economy moves along the SRAS.
- this is at the expense of a rise in price level form P to P1
