Objectives of government economic policy + intro to macroeconomic indicators

What are the 4 variables used to measure national economic performance?

1. Sustained growth

2. Low unemployment

3. Stability of inflation

4. Balance of payments - exports/imports

Why are these 4 variables so important for a government?

They are their main economic objectives

2 other economic objectives of government

1. Reducing wealth inequality

2. Budget surplus/ deficit

Economic growth - definition

This measures the rate of change of a country’s output.

What is measure is used for growth?

Gross domestic product

What does GDP measure?

The sum of a country’s total output of goods and services over 1 year.

Key benefits of economic growth

Job creation → Rising incomes → Improved standard of living → Lower gov spending on welfare

Improved competitiveness of uk economy

Improved confidence of consumers to spend, and firms to invest → multiplier + accelerator effects.

Corporation & income tax + Vat all increase, so more to invest into infrastructure and public services.

Why is unemployment an issue?

It’s a waste of resources as people able to work cannot

Signifies a weak economy

Benefits of low unemployment

Higher incomes → improved standards of living → Reduced poverty → reduced crime rate

Lower gov spending on welfare and higher tax revenue

Improved productivity of the economy

Inflation - definition

The rate of change of prices in an economy.

What measure is used for inflation?

Consumer Price Index (CPI)

Inflation: UK target

Set by an org. that is independent of the government.

2% aim, with price stability, so 1% +/-

Why is inflation important?

Affects the value of £s in your pocket, workers’ wage demands and consumer confidence.

High inflation damages the value of money, so erodes spending power.

Balance of Payments - definition

Measures the UK’s record of economic activities with other countries.

When is a surplus vs deficit?

Export value > import value , surplus

Imports > exports, deficits.

Deficits must be funding (often by borrowing), so surplus/equilibrium is desired.

Does the UK run a trade surplus/deficit?

Runs a deficit in goods, but a surplus in services.

Overall Balance of Payments budget deficit.

Is having a goods trade deficit bad for the UK?

No, not detrimental to the wider economy as we benefit from imports.

Have a tertiary economy, so we mainly produce services rather than raw materials or goods.

How do we benefit from imports?

1. Provides consumers with a wider choice of goods, which may be of higher quality or lower price - increases standards of living.

2. Firms benefit from cheaper imported materials, which reduces costs so maximises profits or makes their prices lower.