The objectives of government economic policy Flashcards
Economic Growth
Definition:
Economic growth is the increase in the total output of goods and services in a country over time.
Key Point:
In the UK, the long-term growth rate is around 2.5%. Emerging markets often focus on improving living standards and development before growth.
Formula:
Economic Growth Rate = (New GDP − Old GDP) / Old GDP × 100
Example:
If GDP grows from £1 trillion to £1.05 trillion, the growth rate is 5%.
Minimising unemployment
Definition:
Minimising unemployment means aiming for as close to full employment as possible.
Key Point:
Governments aim for an unemployment rate of around 3%, accounting for frictional unemployment. The goal is for the workforce to be employed in productive jobs.
Example:
If the unemployment rate is 3%, most people who want jobs are working, but some may be temporarily between jobs.
Price stability
Definition:
The UK government’s inflation target is 2%, measured by the Consumer Price Index (CPI).
Key Point:
The 2% target provides price stability, helping firms and consumers make long-term decisions.
Example:
If inflation is 1% above or below the target, the Governor of the Bank of England must write to the Chancellor explaining why and what actions will be taken.
Stable balance of payments on current account
Definition:
Governments aim to keep the current account near equilibrium, avoiding large deficits.
Key Point:
A balanced current account ensures a country can sustainably finance its payments, which is crucial for long-term growth.
Example:
If a country imports and exports roughly the same amount, it has a balanced current account.
Balanced government budget
Definition:
Governments aim to control state borrowing to prevent the national debt from growing too quickly.
Key Point:
Keeping debt under control allows governments to borrow cheaply in the future and makes repayment easier.
Example:
If a government manages its debt well, it can take out low-interest loans during a crisis.
Greater income equality
Definition:
Income and wealth should be shared fairly to reduce the gap between the rich and poor.
Key Point:
A more equal distribution of wealth is linked to a fairer society.
Example:
If the government raises taxes on the wealthy and provides more social benefits, it helps reduce inequality.
Economic growth vs inflation
Definition:
A growing economy can face rising inflation as average prices increase.
Key Point:
Inflation is more likely when demand (AD) grows faster than supply (AS), especially with a positive output gap.
Example:
If demand rises sharply but supply can’t keep up, prices may increase, leading to inflation.
Economic growth vs the current account
Definition:
During economic growth, consumer spending increases, often worsening the current account deficit in countries like the UK.
Key Point:
In the UK, high spending on imports worsens the current account deficit. However, export-led growth, like in China and Germany, can lead to a current account surplus alongside high growth.
Example:
If UK consumers spend more on imported goods during a boom, the current account deficit grows, unlike export-led economies that see surpluses.
Economic growth vs the government budget deficit
Definition:
Reducing a budget deficit means cutting government spending and increasing tax revenue.
Key Point:
This reduces aggregate demand (AD), which can slow down economic growth.
Example:
If the government raises taxes to reduce the deficit, people may spend less, leading to slower growth.
Economic growth vs the environment
Definition:
High economic growth can lead to negative externalities like pollution and depletion of non-renewable resources.
Key Point:
Increased manufacturing during growth often leads to more carbon dioxide emissions and environmental damage.
Example:
Rapid industrial growth may cause higher pollution levels, contributing to climate change.
Unemployment vs inflation
Definition:
In the short run, there is a trade-off between unemployment and inflation, shown by the Phillips curve.
Key Point:
As economic growth increases, unemployment falls, but rising wages may lead to higher inflation. Supply-side policies can reduce structural unemployment without raising wages.
Example:
When more jobs are created, wages may rise, leading to more spending and higher prices, but supply-side reforms can help balance this.
