2.6.1 - possible macroeconomic objectives

4 main and 3 extra macroeconomic aims of governments

economic growth

low unemployment

low and stable inflation

balance of payments equilibrium on the current account

balanced government budget

environmental protection

greater income equality

annual growth rate target of the UK and most developed nations

2-3%

considered to be sustainable growth

why is this the target rate

less likely to cause excessive demand pull inflation

how do politicians use economic growth

as a metric of the effectiveness of their policies and leadership

4 key points in the UK’s economic growth trends

1998-2007

2008-2015

2016-2019

2020 onwards

1998-2007

steady growth fluctuating between 2-4%

2008-2015

global financial crisis

rapid bounce back due to gov intervention

steady growth

2016-2019

gradual disinflation, possibly due to expectations ab impact of Brexit

2020 onwards

supply chain issues due to brexit

decreased consumption due to COVID

created a deep recession (short lived tho bc of gov intervention)

target rate for UK unemployment

4-5%

can never be 100% employment because there will always be frictional unemployment (ppl transitioning btw calls)

how does this differ between countries

diff countries consider diff percentages as full employment

eg. japan’s is 2.5%

what does there tend to be more emphasis on

unemployment rates within certain sections of the population, (eg. age, ethnicity, etc)

example of ethnic difference in unemployment

2021:

black unemployment 11%
white unemployment 4%

unemployment rate in relation to real GDP growth

INVERSELY PROPORTIONAL (when one goes down, the other goes up)

unemployment during the financial crisis of 2007/8

remained relatively high for the six years following it (hysterisis)

UK target inflation rate

2% (±1%)

why is low inflation good

its a symptom of economic growth

what kinds of policies ease each type of inflation

demand pull = DEMAND-SIDE POLICIES

cost push = SUPPLY-SIDE POLICIES

2 reasons a low and stable rate of inflation is important

allows firms to confidently plan for future investment

offers price stability to consumers

what would be considered as unstable in the UK

a continual deviation from the target of 2%

eg. April 2022 where it was 4-5% - households had less purchasing power

BoP aim

exports = imports

or

exports > imports

what is the government budget

presents all forecasted revenue and expenditure for the year

where does gov revenue come from

sale of assets

taxes

sales revenue from gov-owned goods/services

where does gov expenditure come from

public sector salaries

unemployment benefits

spending on public and merit goods

what does the UK aim for about the budget

for it to be balanced (expenditure = revenue, or more revenue)

what could happen to the budget which we dont want

budget deficit (expenditure>revenue)

has to be financed through public sector borrowing, which adds to public sector debt

what happens if UK government debt becomes too high (as a % of GDP)

lenders lose confidence in the gov’s ability to repay

therefore their borrowing interest rate rises, which makes borrowing more expensive

what happened that ruined any hard work to reduce the budget defecit

covid

ways of reducing the defecit

cutting public sector pay

raising taxes

reducing unemployment benefits

reducing spending on merit goods

UK environmental aim in april 2021

reduce emissions by 78% by 2035

(one of the most ambitious globally)

also includes our share of international aviation/shipping emissions

3 broader environmental aims

focus on sustainability

reduction of negative externalities of production

100% energy from renewable sources by 2035

what can happen when there are high levels of income equality

social unrest

extreme cases = revolution

how is income inequality measured

the Gini Coefficient (from 0 to 1, 1 being the highest level of inequality)

gini target of most developed economies

0.3-0.4

what is, surprisingly, not desirable

perfect income equality

because it removes the incentive to work and study

what can unchecked capitalism lead to

high income inequality

• the wealthy keep buying FoPs

• concentration of ownership becomes more and more narrow (less individuals owning more wealth)

how do we stop complete inequality

government intervention