Edexcel A Level Economics A:复习笔记2.6.1 Possible Macroeconomic Objectives

Economic Growth

  • Economic growth is a central macroeconomic aim of most governments
  • Many developed nations (UK included) have an annual target rate of 2-3%
    • This is considered to be sustainable growth
    • Growth at this rate is less likely to cause excessive demand pull inflation
  • Politicians often use it as a metric of the effectiveness of their policies and leadership
  • Economic growth has positive impacts on confidence, consumption, investment, employment, incomes, living standards and government budgets

united-kingdom-gdp-growth-rate-2022-06-13-macrotrends

A diagram showing the economic growth rate of the UK since 1998
Source: Macrotrends

A Table Highlighting Some of the Economic Growth Trends in the UK Since 1998

1998-2007 2008-2015 2016-2019 2020 -
 

Steady growth fluctuating between 2-4%

Global financial crisis followed by rapid bounce back due to government intervention - and then steady growth Gradual disinflation possibly due to future expectations regarding the impact of the Brexit vote Supply chain issues due to Brexit. Decreased consumption due to the impact of Covid 19. These created a deep recession (short-lived due to government intervention)

 

Low Unemployment

  • The target unemployment rate for the UK is 4-5%
  • This is close to the full employment level of labour (YFE)
    • There will always be a level of frictional unemployment
    • This makes it impossible to achieve 100% employment
  • Different economies have different rates that are considered to be close to the full employment level of labour e.g. Japan's level is about 2.5%
  • Within the broader unemployment rate, there is an increased emphasis on the unemployment rate within different sections of the population
    • E.g. youth unemployment, ethnic/racial unemployment by group
      • In 2021, black unemployment in the UK was 11% and white unemployment was 4.%

united-kingdom-unemployment-rate-2022-06-14-macrotrends

A diagram showing the unemployment rate in the UK from 1998 - 2020
Source: Macrotrends

 

  • Unemployment tends to be inversely proportional to real GDP growth
    • When real GDP increases, unemployment falls
    • When real GDP decreases, unemployment rises
  • Unemployment in the UK remained relatively high for the six years following the global financial crisis of 2007

Low & Stable Rate of Inflation

  • The UK has a target inflation rate of 2% using the Consumer Price Index (CPI)
  • A low rate of inflation is desirable as it is a symptom of economic growth
  • The different causes of inflation (cost push or demand pull) require different policy responses from the Government
    • Demand-side policies ease demand pull inflation
    • Supply-side policies ease cost push inflation

2-1-2-inflation---worked-example_edexcel-al-economics

A diagram illustrating the inflation rate in the UK from 2012 to 2021 using the CPI

 

  • In the UK, a continual deviation from the target of 2% would not be considered as stable
    • An inflation rate in April 2022 of 4-5% was considered to be unstable, eroding household purchasing power
  • A low & stable rate of inflation is important as it
    • Allows firms to confidently plan for future investment
    • Offers price stability to consumers

Balance of Payments Equilibrium On The Current Account

  • The Balance of Payments (BoP) for a country is a record of all the financial transactions that occur between it and the rest of the world
    • The current account focuses mainly on the financial transactions related to exports and imports of goods/services
  • Governments aim for Balance of Payments equilibrium on the Current Account
    • If exports > imports it will create a current account surplus
    • If imports > exports, it will create a current account deficit
      • Each one of these conditions has advantages/disadvantages associated with it
      • However, a current account deficit is more problematic in the long-run
  • The UK has traditionally run a small deficit
    • As a % of GDP the UK current account deficit is insignificant so has not been problematic

united-kingdom-trade-balance-deficit-2022-06-13-macrotrends

A diagram showing the UK Trade Deficit from 1998 to 2020. The bottom graph illustrates the trade deficit as a % of GDP and the top one illustrates the absolute value expressed in US$
Source: Macrotrends

  • In the diagram above the trade deficit has been falling steadily since 2016
    • During this time period the value of exports was increasing slightly faster than the value of imports

Balanced Government Budget

  • The Government Budget is presented annually and includes the forecasted revenue and expenditure
    • Revenue comes from the sale of assets, taxes, sales revenue from goods/services e.g. train tickets
    • Expenditure includes all government spending such as public sector salaries; unemployment benefits; spending on public & merit goods
  • The UK Government aims to run a balanced budget
    • If expenditure > revenue, there is a budget deficit
    • Any deficit has to be financed through public sector borrowing
    • Any borrowing is added to the public sector debt (Government debt)
  • If the UK Government debt becomes too high (expressed as a % of GDP), then lenders begin to lose confidence in the Government's ability to repay the debt
    • The Government then has to raise the interest rate it offers to lenders, which makes borrowing more expensive
  • The UK Government has worked extremely hard recently to reduce the budget deficit and run a balanced budget
    • Covid 19 expenditure has eroded the progress they made

figure-5_-deficit-as-a-percentage-of-gdp-for-the-financial-year-ending-2021-was-12-7-percentage-points-higher-than-in-the-same-period-the-previous-year

Government deficit (net borrowing) as a percentage of GDP - 1973 to 2021
Source: ONS

 

  • Reducing the deficit can mean tough choices for the economy
    • E.g. cutting public sector pay; raising taxes; reducing unemployment benefits; reducing spending on merit goods
  • The significant deficit increase in the 2020/21 budget due to Covid 19 will need to be repaid
    • The short-term help offered through the crisis may generate long-term pain as the Government seeks to cut future spending so as to repay the debt

Environmental Protection

  • In April 2021, the UK Government stated that their environmental aim was to reduce emissions by 78% by 2035
    • This reduction is based on the emission levels of 1990
    • It is one of the most ambitious climate change targets globally
    • It includes the UK’s share of international aviation and shipping emissions
  • Broader environmental aims include
    • A focus on sustainability
    • The reduction of negative externalities of production
    • 100% energy from renewable sources by 2035

Greater Income Equality

  • The reduction of income inequality remains a high priority
  • High levels of income inequality create social unrest and can ultimately lead to revolutions
  • Income inequality is measured using the Gini Coefficient
    • Most developed economies have a Gini target of 0.3-0.4
  • Perfect income equality is not desirable as it removes the incentive to work and study
  • Unchecked capitalism has a natural outcome of high income inequality
    • The wealthy are able to keep buying factors of production
    • The concentration of ownership becomes more and more narrow with fewer individuals owning the bulk of the world's wealth
  • There is a need for the UK government to intervene to maintain acceptable levels of income inequality

statistic_id872472_gini-coefficient-of-the-uk-1977-2021

A diagram showing the general increase in income inequality in the Uk since 1977
Source: ONS

 

  • In the diagram above, the Gini coefficient has been multiplied by 100 to create percentage
    • 34% would equate to a coefficient of 0.34
  • Absolute poverty is worse in developing countries. However, In a developed economy such as the UK, a 1% increase in income inequality can push a lot more households into absolute poverty

 

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