An Introduction to Macroeconomic Objectives (DP IB Economics)

Economic Growth

• Economic growth is a central macroeconomic aim of most governments

• Many developed nations 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 the economic growth rate 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

The economic growth rate of the UK since 1998
Source: Macrotrends

Some of the Economic Growth Trends in the UK Since 1998

Low Unemployment

• The target unemployment rate for many economies is between 2-5%. In December 2022 the unemployment rate in the USA was 3.7% and in Singapore it was 2.6%
  

• Low unemployment rates like this are close to the full employment level of labour (Y_FE)

  • There will always be a level of frictional, seasonal and structural unemployment

  • This makes it impossible to achieve 100% employment and is called the natural rate of unemployment (NRU)
    

• Different economies have different unemployment rates that are considered to be close to the full employment level of labour e.g. Japan's level is about 2.5% while India's is about 5.7%
  

• 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.%

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

Low and Stable Rate of Inflation

• Many economies have 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

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 stable

  • An inflation rate in April 2022 of 4-5% was considered to be unstable, eroding household purchasing power

  • By October 2022 the inflation rate had risen to 11.1%
     

• A low and stable rate of inflation is important as it

  • Allows firms to confidently plan for future investment

  • Offers price stability to consumers

Sustainable Levels of Government Debt

• Governments borrow money in order to run their economies

  • This borrowing is used for both current and capital expenditure 

• Sustainable levels of government debt refers to a situation where the government's borrowing and debt levels are  manageable and they are able to manage repayments without placing their economy at risk

• It is considered a macroeconomic objective because the level of government debt can have wide-ranging impacts on the economy as a whole

•  By managing debt responsibly, governments can create a conducive environment for long-term economic growth, stability, and the well-being of their citizens

The USA debt as a % of their GDP reached 126% in 2020

(Source: Macrotrends)  

• Global studies over the past fifty years have revealed that debt generally becomes unsustainable once it passes an equivalent of 90% of GDP

  • After this level, it is very difficult for the debt to be repaid

  • Larger repayments in the present prevents investment for the future

  • Future generations are burdened with having to repay the debt of the last generation