4.2.1.1 - The Objectives of Government Economic Policy

Policy Objective

A target or goal that a government wishes to achieve

4 Main Policy Objectives of UK Government

Prices (Inflation) - Limit/control inflation to achieve price stability

Unemployment - Create & maintain employment / minimise unemployment

Balance of Payments - Attain a satisfactory balance of payments on current account, avoidance of a persistent external deficit

Economic Growth - Achieve economic growth, improve living standards & levels of economic welfare (as high as possible but also steady & sustainable)

Inflation

A persistent rise in the average price level

Balance of Payments

The difference between the flow of money into and out of a country in a given time period.

Current Account Deficit

When a country imports more than it exports

Short-run Economic Growth

Increase in real GDP in an economy over a period of time

Long-run Economic Growth

Increase in an economy's potential level of real output

2 Other Objectives

Equality - Reduce income inequality

Balancing the Budget - Reduce fiscal budget deficit & national debt

Fiscal Budget Deficit

When a government's expenditure is greater than tax revenue received.

(i.e. When a government spends more than it receives in tax revenue)

National Debt

Accumulation of prior years' fiscal budget deficits

Conflicts when trying to achieve Policy Objectives

P-UB-E

P-E

P & U: Gov reflates the economy (thru policies to stimulate economic activity) to increase output to LOWER UNEMPLOYMENT --> factors of production become more scarce --> increases costs of production --> average price level increase --> INFLATION INCREASES

P & E: Gov reflates the economy (thru policies to stimulate economic activity) to increase output to ACHIEVE ECONOMIC GROWTH --> factors of production become more scarce --> increases costs of production --> average price level increase --> INFLATION INCREASES

B & E: Gov reflates the economy (thru policies to stimulate economic activity) to increase output to ACHIEVE ECONOMIC GROWTH --> inflation increases --> less internationally price competitive --> less exports, more imports --> WORSENING BALANCE OF PAYMENTS POSITION / current account position.