3.2.1.1 THE OBJECTIVES OF GOVERNMENT ECONOMIC POLICY

What are the objectives of macroeconomics policy? (6)

• price stability (consumer price index)

• sustainable growth of real GDP

• falling unemployment/rising employment rate

• higher average living standards

• improve global competitiveness/trade

• inequality of income and wealth

What are objectives?

Objectives are the goals of government policy

What are instruments?

Instruments are the means by which these aims are achieved

What are the key objectives of UK macroeconomic policy?

• stable low inflation

• sustainable growth

• improvements in productivity

• high employment

• rising living standards

• sound government finances

• satisfactory balance of payments

What are the main policy instruments available to meet macroeconomic objectives? (3)

• monetary policy

• fiscal policy

• supply side policies

What is monetary policy?

changes to interest rates, the supply of money and credit and also changes to the value of the exchange rate

What is the fiscal policy?

changes to government taxation, government spending and borrowing

What is supply side policies?

designed to make markets work more effectively

Additions objectives or macroeconomic policy?

• balancing the budget and reducing the national debt

• improved economic well being

• better regional balance in the UK economy

• improved access to public services

• improved competitiveness

• environmental stability

What is the amount that the UK is in debt?

2.6 trillion (debt to GDP ratio of 100%)

What is meant by macroeconomic stability?

economic stability occurs when there is low volatility in key indicators such as prices, jobs, economic growth, interest rates, investment and trade

What are the 4 MAIN macroeconomic objectives of government policy?

• economic growth

• full employment/low unemployment

• limit/control of inflation and price stability

• satisfactory balance of payments

What do non economic macro-objectives focus on?

focus on quality of life, fairness and sustainability (environment sustainability, improved access to public services)

What is an external deficit?

means a country is spending more on goods/services from abroad than it is earning from selling things overseas

What is a surplus?

means income is greater than someone (eg. the government collects more taxes than it spends)

Does the UK have a propensity to export/import goods or services?

• propensity to export services

• propensity to import gooads

When does economic stability occur?

Economic stability occurs when there is low volatility in key indicators such as prices, jobs, economic growth, interest rates, investments and trade

What is low volatility?

When the prices of goods/services/financial assets do not change very much over time

What is an economic cycle?

Natural ups/downs in economic activity

What does per capita mean?

Per person

What does GNY mean?

Gross national income

Who tries to meet the 3rd government objective (price stability)?

The Bank of England

What does short-run economic growth mean?

When an economy starts using more of its existing resources (machinery/automation)

-creates more jobs

-government spending increases - boosting demand

What does long-run economic growth mean?

When an economy's capacity to produce increases

-better labour force (immigration)

-building more roads/factories

What is a PPF graph/curve?

Production possibility frontier

What does capital mean?

Machinery

What does a PPF graph show?

The maximum possible output a country's economy can produce with its resources

• land

• capital (machinery)

What does it mean if the letter are ON the curve of the diagram?

Productively efficient

What does it mean if the letter is OUTSIDE the curve of the diagram?

It is not possible in the short term

What does it mean if the letter is INSIDE the curve of the diagram?

Productively inefficient

What are the 2 aspects of a PPF graph?

• capital goods (Y axis)

• consumer goods (X axis)

What are capital goods?

Man-made resources used to produce goods (machines,tools,vehicles)

What are consumer goods?

Final products that are bought and used (bread/t-shirt/phone)

What is the relationship between capital goods and consumer goods?

more capital goods = less consumer goods

more consumer goods = less capital goods

What happened between 2007-2009?

Global financial crisis (GFC) - economic shock

Why does stockpiling held to boost growth?

Businesses/consumers bought/sold more goods then usual to prepare for possible shortages

What is unemployment?

Unemployment is when people who are willing and able to work, and are actively looking for a job, cannot find paid employment

What is the Beveridge full definition of full employment?

Everyone who is willing to work can find employment

What age is the working force/working population?

16-64

What are you called if you do not find into the bracket of the working age/do not actively seek employment?

Economically inactive

What are other examples of people who are economically inactive?

• won the lottery

• in prison

• stay at home parent

• inherited money

What does AS and AD mean?

AS - Aggregate supply

AD - Aggregate demand

What does aggregate mean?

Coming together (the total of everything - supply and demand)

What is called when each factor or production is being utilized effectively?

Economy is in equilibrium

What does General Price Level mean?

Average of all goods and products across the country

What is the percentage of unemployment?

3%

What does 3% unemployment = ?

3% unemployment = full employment

What is it called when people are going between jobs?

Frictional unemployment

What does "structural unemployment" mean?

Where there is a decline in a sector (primary, secondary, tertiary)

What is "claimant count"?

A key measure used to track unemployment in the UK

Measures the number of people claiming unemployment related benefits

What is "Labour force survey"?

A key measure used to track unemployment in the UK

Household survey used to estimate employment and unemployment

Examples of unemployment related benefits (2)

• jobs seekers allowance

• universal credit

Is the claimant count or the labour force survey usually higher?

The labour force survey is higher than

Why did the unemployment levels increase in COVID?

People became unemployed as businesses could not afford pay/keep them

Why did the claimant count increase in COVID?

Due to the furlow scheme, more people began claiming benefits

Define inflation

A persistent or continuing rise in average price level

What is the current target of inflation?

2% (set by the Bank of England)

Why is inflation key to the economy?

Inflation indicates economic growth

Define deflation

A continuing tendency for the average price level to fall

What are the 2 types of deflation?

• malign

• benign

What is malign and benign deflation?

Malign - harmful to the economy

Benign - doesn’t harm the economy

Define disinflation

When the rate of inflation in falling, but still positive

What is core inflation?

A measure of inflation that excludes items with high volatile prices, such as food and energy (petrol)

Core inflation shows the underlying, long term trends in price changes

What does CPI stand for?

Consumer price index

What is CPI?

A measure that shows how the average prices of goods and services that households buy change over time

What does CPI exclude?

Housing costs (council taxes, rent, mortgages)

What is RPI?

Retail price index - older measure of inflation - includes housing costs

What is RPIX?

Retail price index - excludes interest payments

What is RPIY?

RPI excluding indirect taxes (VAT), includes mortgages (core inflation)

Balance of payments definition

Measured all the currency flows into and out of the economy in a particular time period (month, quarter or year)

Trade deficit (imports/exports)

Imports > Exports

Trade surplus (imports/exports)

Exports > Imports

Does the UK have a propensity to import or export goods or services?

Propensity to export services

Propensity to import goods

What is the current account?

Records a country's transactions with the rest of the world

What are the 2 income flows called in the current account?

• primary income flow

• secondary income flow

What is primary and secondary income flow?

Primary - income earned from UK's labour and capital abroad

Secondary - transfers of income where nothing is received in return

What are the 2 aspects of the current account?

• balance of trade in goods

• balance of trade in services

What is the balance of trade?

Exports of goods minus imports of goods

What is the capital account?

Tracks transfers of capital and non produced/non financial assets

What is the financial account?

Records transactions that involve changes in ownership of financial assets and liabilities between residents and non residents

What does current + capital =?

Financial

Is the UK current running in a trade deficit or surplus?

Trade deficit

Why are we in a trade deficit?

The UK has more money going out of the country rather than coming in