B1.1 Macroeconomic Policy Objectives

Macro economcis

Macroeconomic Policy Objectives

**Sustainable economic growth, low and stable inflation, full employment, balance of trade, budget balance, and economic stability.** There are a number of economic performance indicators which show whether they have been achieved.

Production

Is any **economic activity which leads to a flow of goods and services for which people are willing and able to pay**. It can be categorised as primary, secondary and tertiary production.

Gross Domestic Product

Is a measure of the **final output of goods and services produced** by factors of production - domestically and foreign owned - located **within an economy**.

Gross National Product

Is **GDP plus Net Income** **from** Investments **Abroad**.

Nominal GDP

Measures the total value of t**he final output of goods and services using current prices**: i.e. the prices that existed during the year being measured. It is a measure that has not been adjusted for inflation.

Real GDP

Measures the total value of the **final output of goods and services using constant prices**: i.e. the prices that existed during some given or 'base' year. It is a measure that has been **adjusted for inflation**.

Economic Growth

Is an **increase in the actual and potential output of goods and services produced by an economy**. The rate of economic growth is measured by the **percentage increase in real GDP pa**.

Types of growth

**Short Run** economic growth is an **increase in the actual output** of goods and services; **Long Run economic** growth is an **increase in the actual and potential output** of goods and services; **Trend** economic growth is the **average rate** **over** a given period of time, usually the length of **the cycle**.

Inflation

Is an **increase in the general price level that is sustained over a period of time.** The rate of inflation is measured by the percentage **increase in the CPI pa.**

RPI Measure Inflation

Is the **weighted average** **of the prices in a representative basket of goods and services** - 650 items - at a point in time, **expressed as an index number**. It is based on the spending habits of households taking part in the Family Expenditure Survey. It measures the cost of living.

CPI Measure Inflation

Is the **weighted average price of a basket of goods and services as bought by a representative household excluding housing costs, esp. mortgage interest payments and Council Tax:** i.e. it is similar to the RPI measure. It is based on the European HICP measure.

Inflation Target

Is an inflation rate, as measured by the **CPI, of 2%+/-1% pa**. The **Bank of England** must attempt to achieve this **target** each month.

Claimant Count Measure Unemployment

Is those who register as unemployed and are eligible to receive benefits: i.e. the JSA.

Unemployment

Is those people who are officially registered as **seeking employment and are 'able, available and willing to work at the going wage rate** in any suitable job'. The unemployment rate is **measured as a percentage of the labour force.**

LFS/ILO Measure Unemployment

Is a survey of those who are without a paid job, are **available to start work within two weeks** and have been **looking for work** at some time **in the previous four weeks**.

Full Employment

Exists where there is a suitable job available for anyone who is seeking employment and is 'able, available and willing to work at the going wage rate'. This occurs where the number of **unemployed equals the number of vacancies (U = V)**.

International Trade

Is the **buying and selling** of goods and services **across national frontiers**, between the residents of different countries.

Free Trade

Exists where **international trade takes place unimpeded by any restrictions**: i.e. market forces operate to achieve the most efficient allocation of resources.

The Balance of Payments

Is a **record of all the financial transactions that take place between residents of the UK and residents of the rest of the world over a given period of time**, usually one year - although data is published each month.

The Balance of Payments on Current Account

Records the **financial transactions which relate to the trade in goods and in services, to investment income and to current transfers.** It measures the extent to which our economy is paying its way with the rest of the world.

The Balance of Trade

Is **exports of goods and services minus imports** of goods and services.

A Balance of Payments Deficit

Occurs where on current account t**he credit items are less than the debit items:** i.e. exports of goods and services are less than imports of goods and services (including net income and transfers). This implies that **the country will be borrowing from abroad and/or selling its assets abroad**; e.g. the USA.

A Balance of Payments Surplus

Occurs where on current account the **credit items are more than the debit items:** i.e. exports of goods and services are more than imports of goods and services (including net income and transfers). **This implies that the country will be lending abroad and/or buying assets from abroad**; e.g. China.

The Budget

Is an estimate of **public expenditure and tax revenue for a period of time,** usually a year. It is delivered by the Chancellor of the Exchequer, usually in March.

Public Expenditure

Is **expenditure by the government on goods and services** such as defence, education and the NHS and on transfer payments such as welfare benefits

Taxation

Is a **compulsory levy charged on incomes, profits, and expenditure on goods and services**

Direct Taxation

Is a **compulsory charge imposed by the government on income and profits earned by individuals**; e.g. income tax, corporation tax.

Indirect Taxation

Is a **compulsory charge imposed by the government on the sale of goods and services**; e.g. excise duties, VAT.

Budget Balance

Is the **difference between the levels of tax revenue (T) and public expenditure (G)**. There is a budget surplus if T > G; there is a budget deficit if T < G.

Economic Stability

Is a situation in which the **rates of economic growth and of inflation are stable and predictable**. This should reduce uncertainty. (No more 'boom and bust'.)