Macroeconomic Objectives Revision Notes

3.3.1 An Introduction to Macroeconomic Objectives

• Economic Growth

  • Central aim of most governments
  • Developed nations target annual growth of 2-3% (sustainable growth)
  • Positive impacts: Confidence, consumption, investment, employment, incomes, living standards
  • UK Growth Trends (1998-2020):
  • 1998-2007: Growth fluctuated between 2-4%
  • 2008-2015: Global financial crisis followed by recovery
  • 2016-2019: Gradual disinflation related to Brexit impact
  • 2020: Deep recession due to COVID-19, mitigated by government intervention

• Low Unemployment

  • Target unemployment: 2-5%
  • USA (Dec 2022): 3.7%; Singapore: 2.6%
  • Natural Rate of Unemployment (NRU): Involves frictional, seasonal, and structural unemployment
  • UK Youth unemployment rates (e.g., Black: 11%, White: 4%)

• Low and Stable Rate of Inflation

  • Target inflation rate for many economies: 2%
  • Low inflation indicates economic growth
  • Distinction between demand-pull and cost-push inflation:
  • Demand-side policies can ease demand-pull inflation
  • Supply-side policies can ease cost-push inflation
  • Recent UK inflation rates: 4-11.1% indicating instability

• Sustainable Levels of Government Debt

  • Sustainable debt: Manageable borrowing and repayments without risking the economy
  • Importance: Promotes long-term growth, economic stability, and inter-generational equity
  • USA debt reached 126% of GDP in 2020; unsustainable levels generally exceed 90% of GDP

• Potential Conflicts Between Macroeconomic Objectives

  • High economic growth can fuel inflation
  • Growth can impact environmental sustainability and social inequality
  • Low unemployment can lead to wage inflation affecting other macroeconomic goals

3.3.2 Economic Growth

• Short-term Growth

  • Achieved through shifts in aggregate demand (AD)
  • Illustrated by rightward shifts in AD or by movement towards production possibility curves (PPC)
  • Factors causing shifts: Increase in consumption, investment, government spending, or net exports

• Long-term Growth

  • Driven by improvements in long-run aggregate supply (LRAS)
  • Illustrated by shifts to the right in the LRAS curve on graphs
  • Enhancements include education, migration policies, infrastructure improvements

• Calculating Growth Rates

  • Measure real GDP change; express the growth rate as a percentage
  • Formula:
    ext{Growth Rate} = rac{ ext{New GDP} - ext{Old GDP}}{ ext{Old GDP}} imes 100

• Consequences of Economic Growth

  • Benefits: Improved standard of living, decreased absolute poverty
  • Costs: Environmental strains, income inequality

3.3.3 Low Unemployment

• Definitions and Measurements

  • Employment: Use of labor for production
  • Unemployment: Actively seeking work but not employed
  • Labour Force: Total actively employed and unemployed people
  • Rates calculated using ILO Labour Force Survey and Claimant Count methods

• Difficulties:

  • Underemployment (work below skill level or less hours)
  • Hidden unemployment (those who have stopped seeking work)
  • Unemployment disparities across demographics (e.g., youths, ethnic groups)

• Labour Market Dynamics

  • Equilibrium found where demand for labor equals supply
  • Causes of unemployment impact the equilibrium and include real wage, structural, and cyclical causes

3.3.4 Low & Stable Rate of Inflation

• Understanding Inflation

  • Sustained increase in average price levels of goods/services (CPI measures this)
  • Importance of low inflation (target: 2%) as indicator of growth
  • Key distinctions:
  • Demand-pull inflation: Caused by excess demand
  • Cost-push inflation: Caused by rising production costs

• Impacts of Inflation:

  • Firms face uncertainty; consumers' purchasing power diminishes
  • Governments may experience erosion in competitiveness and economic growth

3.3.5 Sustainable Levels of Government Debt

• Importance of Sustainable Debt:

  • Maintains economic stability, fiscal sustainability, and limits burden on future generations
  • Governments measured debt as a function of GDP, essential to analyze sustainability

• Consequences of High Debt:

  • Restricted fiscal flexibility
  • Higher borrowing costs leading to lower private investment
  • Intergenerational equity issues

3.3.6 Potential Conflicts Between Macroeconomic Objectives

• Trade-offs in Objectives:

  • High economic growth vs. inflation
  • Growth vs. environmental impact
  • Unemployment vs. inflationary pressures

• Philips Curve Dynamics:

  • Short-run: Trade-off exists (higher inflation corresponds with lower unemployment)
  • Long-run: Inflation stabilizes at the Natural Rate of Unemployment, reducing inflation without changing unemployment levels.