An Introduction to Macroeconomic Objectives (DP IB Economics)
Revision Note
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
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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 (YFE)
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
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