Intro to Macroeconomic Objectives

Intro to Macroeconomic Objectives content slideshow. Designed for the Economic A level qualification. Can be used in revision and in class.

1. Intro to Macroeconomic Objectives Lower 6 th Macro Macroeconomic Objectives

2. Intro to Macroeconomic Objectives Definition: In macroeconomics, the health of an economy is determined by how well it is achieving a set of objectives as defined by specific measures and targets. For the UK economy there are four primary objectives and several secondary objectives. Targets are set for these objectives, and the strength of the UK economy is measured based on the proximity to these targets. Primary Objectives Steady and sustainable Economic growth : The level of output is increasing, meaning that citizens will have higher living standards, but at a level that is sustainable so that output and living standards won’t be liable to decrease into the future. Target: Whilst there is no specific numerical target, the government aims to achieve economic growth close to the long run trend rate, currently this about a 2.5% increase in output per year (about 0.7% per quarter). Price Stability: Where inflation (the rise of the ‘general price level’) is low and prices remain largely stable. There is no rapid inflation or deflation (a fall in ‘general price level’). This is not necessarily the same as zero inflation, but instead steady levels of low-moderate inflation are often regarded as ideal as this gives a degree of flexibility to prices. In fact, zero inflation is often a concern as it is dangerously close to deflation. Target: The Government’s inflation target is a 2.0 (± 1.0) % increase in consumer price index (a measure of ‘general price level’).

3. Full employment: where those who are able and willing to work either have a job or can get readily one. This is not the same as ‘zero unemployment’ given that there will be a certain amount of frictional, seasonal and structural unemployment (referred to as the natural rate of unemployment). Target: The UK aims to have the actual unemployment rate (percent of the labour force who are out of work) as close to the natural rate of unemployment as possible. In the UK, the office for budget responsibility estimate of the natural rate of unemployment was 4.5% in 2018. A ‘Balanced’ current account: The current account on the balance of payments measures the inflow and outflow of goods and services (i.e. exports and imports), investment incomes and transfer payments between an economy and the rest of the world. Target: Whilst there is no set numerical target, the UK has consistently run a current account deficit for the last two decades. It is generally considered that a balanced current account or a surplus would be better for an economy’s health. Therefore the government’s ongoing target is to continue to cut the country’s current account deficit.

4. Secondary Objectives The UK government also aims to pursue the following secondary objectives: Environmental protection: In meeting the primary objectives, the government aims to protect the environment as much as possible to protect future living standards as much as possible A Balanced Budget: Over an economic cycle, governments aim to have their expenditure equal to the revenue they receive through taxes and other means. Too much spending will lead to growing national debt which is costly to pay back and may harm an economy’s growth in future. Too much taxation represents a withdrawal of money circulating in the economy and cuts demand. Reducing inequality in wealth and income: In rich and poor countries, inequality is strongly correlated with shorter spells of economic expansion and less growth over time. Reducing inequality would see the average living standard rise and more people escape from poverty. However, like some other economic objectives, the distribution of income is a partly subjective or normative issue and the target level depends on the who is being asked.

5. Secondary Objectives The UK government also aims to pursue the following secondary objectives: Environmental protection: In meeting the primary objectives, the government aims to protect the environment as much as possible to protect future living standards as much as possible A Balanced Budget: Over an economic cycle, governments aim to have their expenditure equal to the revenue they receive through taxes and other means. Too much spending will lead to growing national debt which is costly to pay back and may harm an economy’s growth in future. Too much taxation represents a withdrawal of money circulating in the economy and cuts demand. Reducing inequality in wealth and income: In rich and poor countries, inequality is strongly correlated with shorter spells of economic expansion and less growth over time. Reducing inequality would see the average living standard rise and more people escape from poverty. However, like some other economic objectives, the distribution of income is a partly subjective or normative issue and the target level depends on the who is being asked. Exchange rate stability: Countries, especially developing ones, pursue stable exchange rates to attract foreign capital and ensure stable foreign trade. 

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