The Five Macroeconomic Aims (Cambridge (CIE) O Level Economics)

Revision Note

Steve Vorster

Written by: Steve Vorster

Reviewed by: Jenna Quinn

Economic Growth

  • Economic growth is a central macroeconomic aim of most governments 

  • Many developed nations have an annual target growth 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 diagram showing the economic growth rate of the UK since 1998
Source: Macrotrends
A diagram showing the economic growth rate of the UK since 1998 Source: Macrotrends


A Table Highlighting 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 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

  • Someone is considered to be unemployed if they do not have a job and are actively seeking for one 

  • The target unemployment rate often depends on the size of the economy e.g. India finds a rate of 6.5% good whereas Singapore aims for it to be under 2%

  • The closer an economy is to the full employment level of labour, the better (more efficiently) it is using its human resources  

  • 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 USA was 8.7% and white unemployment was 4.7%

Line chart showing unemployment rate from 1998 to 2020, peaking at around 8% in 2010 and declining to 3.5% in 2019. Many downward spikes seen.
A diagram showing 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

  • Unemployment in the UK remained relatively high for the six years following the global financial crisis of 2007

Low and Stable Rate of Inflation

  • Most 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

Line graph of the UK Consumer Prices Index from 2013 to 2021 showing inflation rising to 4.2%, above the Bank of England's 2% target.
A diagram illustrating 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 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 Stability 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

Two line charts showing annual data from 1998 to 2020: Top chart illustrates values in billions of US dollars, and bottom chart shows percentages of GDP. Both charts show sharp increases around 2020.
A diagram showing the UK Trade Deficit from 1998 to 2020. The bottom graph illustrates the trade deficit as a % of GDP and the top one illustrates the absolute value expressed in US$ Source: Macrotrends
  • 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

The Redistribution of Income

  • The redistribution of income aims to reduce income inequality in an economy

    • High levels of income inequality create social unrest and can ultimately lead to revolutions

    • Perfect income equality is not desirable as it removes the incentive to work and study 

  • Governments aim to redistribute income by taxing the wealthy and providing welfare payments to the poor 

  • 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 governments to intervene to maintain acceptable levels of income inequality

  • Absolute poverty is usually worse in developing countries. However, in a developed economy such as Germany, a 1% increase in income inequality can push a lot more households into relative poverty

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Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

Jenna Quinn

Author: Jenna Quinn

Expertise: Head of New Subjects

Jenna studied at Cardiff University before training to become a science teacher at the University of Bath specialising in Biology (although she loves teaching all three sciences at GCSE level!). Teaching is her passion, and with 10 years experience teaching across a wide range of specifications – from GCSE and A Level Biology in the UK to IGCSE and IB Biology internationally – she knows what is required to pass those Biology exams.