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

• 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

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

• 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.%

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

• 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

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

• 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

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

• 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

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

• 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

• 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

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