Measurement of macroeconomic performance
The objectives of government economic policy
4 macroeconomic objectives to provide macro stability.
Economic growth:
● UK economic growth is about 2.5%. Governments aim for sustainability
● In emerging markets, governments might aim to increase economic
development before economic growth, to improve living standards, life
expectancy + literacy
Minimising unemployment:
● Aim for as near to full employment as possible. They account for
frictional unemployment by aiming for an unemployment rate of around
3%
Price stability:
● The UK inflation target is 2%, measured with CPI
● This aims to provide price stability + support long run decisions
Stable balance of payments on current account:
● Governments aim for the current account to be satisfactory, so there is
not a large deficit. This is usually near to equilibrium
● A balance of payments equilibrium on the current account means the
country can sustainably finance the current account, which is important
for long term growth.
Other macroeconomic objectives
Balanced government budget:
● Ensure control of state borrowing, so the national debt doesn’t
escalate
● This allows cheap borrowing in the future + easier repayment
Greater income equality:
● Income and wealth should be distributed equitably, so the wealth gap
is not extreme
Potential conflicts and trade-offs between the macroeconomic objectives
(generally in the short run):
Economic growth vs inflation:
A growing economy is likely to experience inflationary pressures on the
average price level. This is especially true when there is a positive output
gap and AD increases faster than AS.
Economic growth vs the current account:
High spending during economic growth - more imports - worsening the
, current account deficit. However, export-led growth e.g. in China +
Germany, means a country can run a current account surplus and have high
economic growth.
Economic growth vs budget deficit:
Reducing a budget deficit requires less expenditure + more tax revenue.
This would lead to a fall in AD + less economic growth.
Economic growth vs the environment:
High rates of economic growth result in high levels of negative
externalities e.g. pollution.
Unemployment vs inflation:
In the short run, there is a trade-off between unemployment + inflation
rates. This is illustrated with a Phillips curve. As economic growth
increases, unemployment falls due to more jobs being created. However,
this causes wages to increase, leading to more spending + an increase in
the average price level.
The extent of this trade off can be limited if supply side policies are used to
reduce structural unemployment, which will not increase average wages.
Macroeconomic indicators
The objectives of government economic policy
4 macroeconomic objectives to provide macro stability.
Economic growth:
● UK economic growth is about 2.5%. Governments aim for sustainability
● In emerging markets, governments might aim to increase economic
development before economic growth, to improve living standards, life
expectancy + literacy
Minimising unemployment:
● Aim for as near to full employment as possible. They account for
frictional unemployment by aiming for an unemployment rate of around
3%
Price stability:
● The UK inflation target is 2%, measured with CPI
● This aims to provide price stability + support long run decisions
Stable balance of payments on current account:
● Governments aim for the current account to be satisfactory, so there is
not a large deficit. This is usually near to equilibrium
● A balance of payments equilibrium on the current account means the
country can sustainably finance the current account, which is important
for long term growth.
Other macroeconomic objectives
Balanced government budget:
● Ensure control of state borrowing, so the national debt doesn’t
escalate
● This allows cheap borrowing in the future + easier repayment
Greater income equality:
● Income and wealth should be distributed equitably, so the wealth gap
is not extreme
Potential conflicts and trade-offs between the macroeconomic objectives
(generally in the short run):
Economic growth vs inflation:
A growing economy is likely to experience inflationary pressures on the
average price level. This is especially true when there is a positive output
gap and AD increases faster than AS.
Economic growth vs the current account:
High spending during economic growth - more imports - worsening the
, current account deficit. However, export-led growth e.g. in China +
Germany, means a country can run a current account surplus and have high
economic growth.
Economic growth vs budget deficit:
Reducing a budget deficit requires less expenditure + more tax revenue.
This would lead to a fall in AD + less economic growth.
Economic growth vs the environment:
High rates of economic growth result in high levels of negative
externalities e.g. pollution.
Unemployment vs inflation:
In the short run, there is a trade-off between unemployment + inflation
rates. This is illustrated with a Phillips curve. As economic growth
increases, unemployment falls due to more jobs being created. However,
this causes wages to increase, leading to more spending + an increase in
the average price level.
The extent of this trade off can be limited if supply side policies are used to
reduce structural unemployment, which will not increase average wages.
Macroeconomic indicators
