2.1.1 Macroeconomic objectives
a) Economic growth
Definition: Economic growth is the increase in the total output of goods and services produced in an economy over a period of time.
Measurement of economic growth using GDP
Definition: Gross domestic product (GDP) is the total market value of all final goods and services provided within an economy by its factors of production in a given period of time.
Economic growth is measured using percentage increases in gross domestic product. The main types of GDP include:
Nominal GDP - Measures the total monetary value of all goods and services produced in an economy, without being adjusted for inflation.
Real GDP - Measures the total monetary value of all goods and services produced in an economy at current market prices after being adjusted for inflation to reflect true economic growth.
GDP Per Capita - GDP divided by the population which reflects average income.
Limitations of GDP as a measure of growth:
Does not account for hidden markets (black markets) activities.
Does not account for income distribution.
Ignores environmental costs.
Does not measure quality of life/standard of living.
Lacks information on sustainability.
Economic Cycle Diagram
Boom
Economic growth - Fast growth.
Inflation - High due to demand-pull pressure.
Unemployment - Low due to increased job opportunities.
Downturn
Economic growth - Slows as demand decreases.
Inflation - Starts to fall.
Unemployment - Slightly increases due to reduced production.
Recession
Economic growth - Negative or very low.
Inflation - Very low or deflation occurs.
Unemployment - High
Recovery
Economic growth - Slightly increases.
Inflation - Begins to rise.
Unemployment - Decreases as demand rises.
Impacts of economic growth:
Employment - There are more job opportunities, increasing employment.
Standards of living - Improve due to higher wages and purchasing power.
Poverty - Decreased poverty as higher national income allows governments to increase welfare spending.
Productive potential - Increases by enabling investment in technology, human capital and infrastructure.
Inflation - Increases as demand may be higher than supply causing demand-pull inflation.
Environment - May negatively impact the environment due to pollution and resource depletion.
b) Low and stable inflation
Definition of inflation: Inflation is the rate at which the general level of prices for goods and services rises over a period of time
Definition of deflation: Deflation is the rate at which the general level of prices for goods and services decreases over a period of time.
Types of inflation:
Demand-pull - Occurs when aggregate demand in an economy exceeds aggregate supply, causing prices to rise due to excess demand.
Cost-push - When production costs increase, leading to higher prices for goods and services.
Relationship between inflation and interest rates
Inflation and interest rates are relevant as lower inflation would lead to lower interest rates, encouraging borrowing and discouraging saving. On the other hand, increased inflation would cause central banks to increase interest rates to increase saving and control price increases.
Impacts of inflation:
Prices - Prices increase, reducing purchasing power (the value of a currency expressed in terms of the number of goods or services that one unit of money can buy).
Wages - Wages may not increase at the same rate as inflation which decreases living standards. Workers demand higher wages to match the cost of living, leading to inflation increasing further.
Exports - Domestic goods become more expensive than foreign goods, decreasing exports as international buyers look for cheaper alternatives.
Unemployment - Cost-push inflation may result in firms reducing employee numbers due to rising costs impacting profitability.
Menu costs - Businesses must frequently update prices.
Shoe leather costs - Businesses and consumers spend more time managing finances to minimise the impacts of inflation.
Uncertainty - Due to difficulties in predicting costs and demand, businesses delay or reduce long-term investments.
Business and consumer confidence - Inflation discourages spending and investment due to increased prices.
Investment - High inflation reduces confidence, decreasing investment and spending.
c) Low unemployment
Definition: Unemployment is the number of people of working age, willing and able to work and actively seeking work but cannot find a job.
Measurement of Unemployment
Unemployment in the UK is measured using the International Labour Organization (ILO) measure which involves a Labour Force Survey (LFS). The survey is conducted quarterly (four times a year) and involves people in randomly selected households answering questions about work-related activities such as their availability for work and job-seeking efforts.
Types of Unemployment:
Cyclical - Unemployment caused by a lack of demand for goods and services during periods of economic downturn.
Structural - Unemployment caused by a lack of demand for goods and services in a specific industry due to structural changes in the economy.
Seasonal - Unemployment during periods of low demand due to seasonal factors.
Voluntary - When individuals choose to be unemployed.
Frictional - Unemployment when people are temporarily between jobs or searching for new employment.
Impacts of unemployment:
Output - Decreases due to fewer people working and producing goods and services.
Use of scarce resources - Underutilised resources as there may not be enough people to use resources and equipment, leading to an inefficient allocation of resources.
Poverty - Increases as those unemployed struggle to fund basic needs.
Government spending on benefits - Governments increase welfare expenditure to support those out of work.
Tax revenue - Tax revenue decreases as fewer people work, therefore less income can be taxed.
Consumer confidence - Decreases due to uncertainty about job security and financial stability.
Business confidence - Decreased due to lower consumer spending which may lead to reduced sales and profits.
Society - Increase of social issues such as crime, social unrest, and mental health issues.
d) Surplus or balance on the current account of the balance of payments
Definition of balance of payments: A financial record of all economic transactions between a country and the rest of the world over a specific period of time.
Definition of current account: A part of the balance of payments that records a country's trade in goods and services.
Current account surplus: When the value of a country's exports exceeds the value of its imports over a specific period of time.
Current account deficit: When the value of a country's imports exceeds the value of its exports over a specific period of time.
Trade in goods (visible): Trade in goods (visible trade) refers to the import and export of physical, tangible items such as machinery, food, clothing, and raw materials.
Trade in services (invisible): Trade in services (invisible trade) refers to the import and export of intangible items such as tourism, insurance and education.
Relationship between current account and exchange rates
Current account deficit (value of imports greater than the value of exports) - If a country buys more from abroad than it sells, its currency may depreciate
Surplus (value of exports greater than the value of imports) - If a country sells more abroad than it buys, its currency may appreciate.
Depreciation helps exports - A weaker currency makes the country’s goods cheaper for other countries, increasing exports.
Appreciation hurts exports - A stronger currency makes the country’s goods more expensive for others, reducing exports.
Fixed exchange rates - The government controls the exchange rate and might intervene to stop big changes.
Examples of real-world exchange rates
British Pound (GBP) to US Dollar (USD)
£1 = $1.23
This means one pound is worth 1.23 US dollars.
British Pound (GBP) to Euro (EUR)
£1 = €1.14
This means one pound is worth 1.14 euros.
Reasons for deficits and surpluses:
Quality of domestic goods - High-quality domestic goods attract foreign buyers, leading to more exports (surplus). Lower-quality goods are less attractive to buyers, reducing exports (deficit).
Quality of foreign goods - Domestic consumers are more inclined to purchase high-quality foreign, increasing imports (deficit). Lower-quality foreign goods are less desirable, reducing imports (surplus).
Price of domestic goods - If domestic goods are priced lower, they become more competitive in the global market, increasing exports, and leading to a surplus. However, if they are too expensive, foreign buyers may turn to cheaper alternatives causing a deficit.
Price of foreign goods - If foreign goods are cheaper, domestic consumers will buy more of them, increasing imports, and causing a deficit. If foreign goods are too expensive, domestic consumers may prefer local products, reducing imports, and causing a surplus.
Exchange rates between countries - Weaker domestic currency makes exports cheaper for foreign buyers, boosting exports (surplus), while making imports more expensive for locals, reducing imports (deficit). Conversely, a stronger currency makes exports more expensive and imports cheaper, leading to a deficit.
Impact of current account deficit:
Leakage from the economy - More money flows out of the economy due to a deficit to pay for imports than is coming in from exports this leads to reduced domestic spending and investment.
Can be inflationary if prices rise abroad - The increase in foreign prices can make imports more expensive, causing domestic prices to increase leading to inflation.
Low demand for our exports - Low demand for domestic exports may cause a deficit, reducing the money coming into the economy and leading to a further deficit.
Problems finding foreign reserves to fund the deficit - An issue with the balance of payments may occur if the country is unable to keep foreign exchange reserves to cover the deficit.
e) Protection of the environment
Ways businesses damage the environment:
Visual pollution - Litter may cause areas to be less visually appealing.
Noise pollution - Noise from factories and machinery may disturb nearby residents and wildlife.
Air pollution - Harmful emissions from factories and vehicles contribute to smog and global warming.
Water pollution - Emptying waste into water bodies may damage aquatic life or harm those using water from these sources.
Government intervention to protect the environment:
Taxation - Imposing taxes on harmful practices discourages production.
Subsidy - Providing financial support to businesses conducting environmentally friendly practices increases production, encourages consumption and provides incentives for other firms to act in this way.
Regulation - Laws that limit pollution are enforced to reduce environmental damage.
Fines - A sum of money charged by the government as a ppunishment will deter firms from conducting environmentally damaging practices.
Pollution permits - Allowing business to buy and sell permits allowing them do pollute a certain amount will create incentive to reduce emissions.
Government provision of parks - Creating and maintaining public areas such as parks will improve air quality.
f) Redistribution of income
Definition of income inequality: Income inequality refers to the unequal distribution of income among individuals or households within a country.
Definition of absolute poverty: Absolute poverty is the inability to afford basic necessities needed to live.
Definition of relative poverty: Relative poverty is when households are living with less than 60% of the median household income.
Reasons to reduce poverty and inequality:
Meet basic needs - Ensures everyone has access to essential resources such as food, shelter, healthcare, and education.
Raise standards of living - Improves quality of life and provides people with more opportunitities.
Ethical reasons - Promotes equality and social justice, reducing disparities and fostering a more equitable society.
Government intervention to reduce inequality and poverty
Progressive taxation - Higher income individuals pay a larger percentage of their income in taxes, aiming to reduce income disparities.
Redistribution through benefit payments - Providing financial support to the unemployed or elderly to support low income individuals.
Investment in education and healthcare - Increasing access to education and healthcare enables people to work and provides more people with skills which can be contributed to the economy through their work.
