An Introduction to Macroeconomic Objectives (DP IB Economics)

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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

united-kingdom-gdp-growth-rate-2022-06-13-macrotrends

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


Some of the Economic Growth Trends in the UK Since 1998


1998 - 2007


2008 - 2015


2016 - 2019


2020 - 

  • Steady growth fluctuating between 2-4%

  • Global financial crisis followed by a rapid bounce back due to government intervention - and then steady growth

  • Gradual disinflation possibly due to future expectations regarding the impact of the Brexit vote

  • Supply chain issues due to Brexit. Decreased consumption due to the impact of Covid 19. These created a deep recession (short-lived due to government intervention)

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.%

united-kingdom-unemployment-rate-2022-06-14-macrotrends

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

2-1-2-inflation---worked-example_edexcel-al-economics

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

united-states-debt-to-gdp-ratio-2023-06-07-macrotrends

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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