Unit 9

• Government macroeconomic objectives

  • Economic growth
  • Minimising unemployment
  • Price stability
  • Stable balance of payments on current account
• Economic growth

  In the UK, the long run trend is about 2.5%. Governments aim to have sustainable economic growth for the long run.
• Economic development

  In emerging markets and developing economies, governments might aim to increase economic development before economic growth, which will improve living standards, increase life expectancy and improve literacy rates.
• Minimising unemployment

  Governments aim to have as near to full employment as possible. They account for frictional unemployment by aiming for an unemployment rate of around 3%. The labour force should also be employed in productive work.
• Price stability

  In the UK, the government inflation target is 2%, measured with CPI. This aims to provide price stability for firms and consumers, and will help them make decisions for the long run. If the inflation rate falls 1% outside this target, the Governor of the Bank of England has to write a letter to the Chancellor of the Exchequer to explain why this happened and what the Bank intends to do about it.
• Stable balance of payments on current account

  Governments aim for the current account to be satisfactory, so there is not a large deficit. This is usually near to equilibrium. A balance of payments equilibrium on the current account means the country can sustainably finance the current account, which is important for long term growth.
• Additional government macroeconomic objectives

  • Balanced government budget
  • Greater income equality
• The importance of each objective changes over time
• Economic growth

  Inflationary pressures on the average price level
• Economic growth


  Worsening of the current account deficit
• Reducing a budget deficit

  Fall in aggregate demand, less economic growth
• High rates of economic growth

  High levels of negative externalities, such as pollution and the usage of non-renewable resources
• Increasing economic growth

  Unemployment falls, inflation increases
• The extent of the unemployment-inflation trade-off can be limited if supply side policies are used to reduce structural unemployment, which will not increase average wages
• Real GDP


  GDP measures the quantity of goods and services produced in an economy (national output). Real GDP is the value of GDP adjusted for inflation.
• Rise in economic growth

  Increase in national output
• Real GDP per capita

  The value of real GDP divided by the population of the country. Measures the average output per person in an economy.
• Consumer Prices Index (CPI)


  Measure of inflation in the UK, based on a basket of goods and services weighted according to household spending patterns
• Retail Prices Index (RPI)

  Alternative measure of inflation in the UK, includes housing costs like mortgage interest and council tax
• RPI vs CPI

  RPI tends to have a higher value than CPI
• Claimant Count

  Counts the number of people claiming unemployment related benefits, have to prove actively looking for work
• International Labour Organisation (ILO) and UK Labour Force Survey (LFS)


  Directly asks people if they meet criteria for unemployment (out of work for 4 weeks, able and willing to start in 2 weeks, available for 1 hour per week)
• ILO/LFS vs Claimant Count

  ILO/LFS gives a higher unemployment figure than Claimant Count as it includes part-time unemployed
• Productivity


  Output per worker per period of time, measures efficiency of production
• Balance of payments on current account

  Record of all financial transactions between a country and other countries, includes trade in goods and services
• Exports

  Goods and services sold to foreign countries, positive in the balance of payments as an inflow of money
• Imports

  Goods and services bought from foreign countries, negative in the balance of payments as an outflow of money
• Index numbers

  Used to make comparisons between years, and to measure the magnitude of change over time
• How index numbers are calculated

  1. Base year is used and compared to other years

  2. If base year is 2015 with value 100, and inflation rises 5% by 2018, the index number for 2018 will be 105
• How index numbers measure changes

  • In the price level
  • In other economic variables
• Calculation of CPI

  1. Different items in the basket of goods have different weights

  2. Food has much larger weighting than clothing since consumers spend more on food

  3. Index number measures the change in price over time
• Calculation used for index numbers

  1. (Pn/P0) x 100

  2. Where P0 is the price level in the base year and Pn is the price in the year being compared
• Assigning weights

  1. Where Q0 is the quantity of the unit being compared and P0 is the original price of the unit

  2. The total amount spent in the base year is P0 x Q0

  3. The amount spent on each unit in a later year is
• Economic growth


  Rise in the value of Gross Domestic Product (GDP)
• GDP

  Measures the quantity of goods and services produced in an economy
• Economic growth


  Leads to higher living standards and more employment opportunities
• Real GDP


  Value of GDP adjusted for inflation
• Nominal GDP


  Value of GDP without being adjusted for inflation
• Nominal economic growth can be misleading as it can make GDP appear higher than it really is
• Total GDP

  Combined monetary value of all goods and services produced within a country's borders during a specific time period