Possible Macroeconomic Objectives (Edexcel A Level Economics A)

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

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

Low Unemployment

• The target unemployment rate for the UK is 4-5%

• This is close to the full employment level of labour (Y_FE)

  • 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.%

• 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

• 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 and 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

• 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 and 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

• 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

• 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