Economic Growth (Edexcel IGCSE Economics)

An Introduction to the Macroeconomic Objectives

• Macroeconomic Objectives are goals set by the government aimed at improving the overall economic performance of a country as well as the quality of life of its citizens

• The government aims to achieve these objectives through the use of macroeconomic policies

• It can be difficult to achieve some outcomes simultaneously

  • E.g High economic growth and stable price levels can be in conflict with one another, as growth can drive upthe general price level

The macroeconomic objectives

• Economic growth: this is the annual increase in the level of national output as measured by the gross domestic product (GDP)

• Low and stable rate of inflation: generally, an inflation target of 2% is set

• Low unemployment: the lower the unemployment level, the more productive are the human factors of production - and the higher the nation's output

• Stable current account balance of payments: the current account primarily considers the value of trade in a nation's exports and imports. Wild fluctuations are a sign of an unstable economy

• Environmental protection: rapid economic growth often occurs at the expense of the environment, which has a knock-on effect on citizens. Protecting the environment is a key 21st century goal

• Equity in the distribution of income: the wider the disparity between rich and poor, the more socially unstable an economy becomes

Investigating Economic Growth

• Economic growth is the annual increase in the level of national output as measured by the gross domestic product (GDP)

  • GDP is the total value for all goods and services produced in an economy in a year

• 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

• Strong economic growth means higher incomes, lower unemployment rates and better government budgets

• Sustainable economic growth will have less demand-pull inflationary pressures or excessive environmental pressure

(Source: Macrotrends)

Graph analysis 

Summary of Economic Growth Trends in the UK Since 1998

Limitations of Using GDP to Measure Growth

• Using GDP as a measure of economic health of a country has numerous limitations

• A better measure of economic growth is GDP per capita (GDP / the population)

  • It shows the mean wealth of each citizen in a country

  • This makes it easier to compare standards of living between countries. For example, Switzerland has a much higher GDP/capita than Burundi 

  Limitations of Using GDP to Measure Growth

  Limitation	Explanation
  Lack of information provided on inequality	The distribution of income in an economy is provided as an average (GDP/capita) The differences in the standard of living within the same country can be significant
  Quality of goods and services	GDP provides no information on the increase/decrease in the quality of goods/services over time If quality worsens but prices are lower, then the standard of living is judged to have increased  The poor quality may actually have decreased the standard of living
  Does not include unpaid/voluntary work	If it included voluntary/unpaid work, then GDP/capita would be higher E.g some economies have a high amount of family child care provision. This increases standards of living but is not recorded in any way
  Differences in hours worked	GDP data does not capture the amount of time taken to produce the GDP/capita In one country, where it takes less time to generate income than in a similar country, the standard of living would actually be higher
  Environmental factors	GDP does not capture the environmental and health impacts of generating income within a country (externalities) In one country, where there are fewer externalities in generating income, the standard of living would be higher