6.1 The objectives of government economic policy

Macroeconomics

The study of the whole economy at aggregate leve, Aggregate meaning the total demnad, supply, income, expenditure in an economy over a given period of time. It focuses on large-scale economic factors, such as national productivity, inflation, and unemployment, and how they interact within the economy.

The four main objectives of a governments macroeconomic policy

• Achieving economic growth

• Low unemployment

• Price stability/ stable income

• Attain a satisfactory balance of payments

Economic Growth

The increase in the output of goods and services in an economy over a period of time. It is typically measured by the rise in Real GDP, or Real GDP per capita.

Short run economic growth

Growth of real output resulting from using idle resource, thereby taking taking up the slack in the economy

Long run economic growth

an increase in the economy’s potential level of real output, and an outward shift of the economy’s production possibility frontier

GDP

Gross domestic product- the sum of all goods and services, or level of output produced in the economy over a period of time.

Real GDP

A measure of all goods and services produced in an economy, adjusted for price changes or inflation.

What does the adjustment of Real GDP do

Transforms changes in nominal GDP (which is measured in money terms) into a measure that reflects the changes t- the total out-it of the economy

Nominal GDP

GDP measured at the current market prices, without removing the effects of inflation

Full employment- Beveridge

When 3% or less of the labour force are unemployed

Full employment- free market definition

Level of employment occurring at market-clearing real-wage rate where the number of workers who employers wish to hire equals the number of workers wanting to work.

Claimant count

The method of measuring unemployment according to those people who are claiming unemployment related benefits e.g Jobs Seekers Allowance

Labour Force Survey

A quarterly sample survey of households in the UK that seeks information on people’s personal circumstances and their labour market status during a period of 1-4 weeks

Inflation

A persistent or continuing rise in the average price level

Deflation

A persistent of continuing fall in the average price level

Disinflation

When the rate of inflation is falling but is still positive

Price index

An index number showing the extent to which a price, or ‘basket’ of prices have changed over a period of time (month, quarter or year) in comparison with the price(s) in a base year.

CPI- Consumer price index

the official measure used to calculate the rate of consumer price inflation in the UK. Calculates the average price increase of a basket of 700 different consumer goods and services

RPI- Retail prices index

Used to calculate the rate of consumer price inflation in the UK(used for updating each year the cost of TV and motor vehicle licenses) - no longer an official national statistic

Indextation

The automatic adjustment of items such as pensions and welfare benefits to changes in the price level, through the use of a price index

What does controlling inflation mean in the UK

Achieving a low inflation rate- 2%.

Balance of payments

A record of all the currency flows into and out of a country in a particular time period

Current account of the balance of trade payments

Measures all the currency flows into and out of a country in a particular time period in payment for exports and imports together with income and transfer flows

Exports

Domestically produced goods or services sold to residents of other countries

Imports

Goods and services produced in other countries and sold to residents of this country

Balance of trade

The difference between the money value of a countries imports and its exports. It’s the largest component of a country’s balance of payments on current account

Balance of trade deficit

The money value of a countries imports exceeds its exports

Balance of trade surplus

The money value of a country’s exports exceeds the money value of its imports

Capital

the physical or financial resources used to produce value in an economy

Balanced budget

When government spending equals government revenue, which is mostly tax revenue

Budget deficit

When government spending is greater than government revenue

Policy conflict

When two or more policy objectives cannot both be achieved at the same time: better performance in achieving one, the worse in the other

Trade- off between policy objectives

Policy makers choosing an acceptable combination of objectives lying between the extremes

What did Keynesian economists believe about economic policy

That it should be used to achieve full employment, economic growth and a generally acceptable of fair distribution of income and wealth

Keynesian economists

Followers of the economists John Maynard Keynes, who generally believe that governments should manage the economy, particularly through the use of fiscal policy.

Before 2009, where UK governments more focused on controlling inflation or full employment

Controlling inflation

Pro-free market economist

Opposition of Keynesian economists, who dislike government intervention in the economy and prefer the operation of free markets

Monetary policy

Used by the government and Bank of England on interest rates and other monetary instruments to try to achieve the governments policy objectives

Fiscal policy

The use by the government of government spending and taxation to try to achieve the governments policy objectives