possible-macroeconomic-objectives

Economic Growth

• Economic growth is a central macroeconomic aim of most governments

• 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

A Table Highlighting Some of the Economic Growth Trends in the UK Since 1998

Low Unemployment

• The target unemployment rate for the UK is 4-5%

• This is close to the full employment level of labour (Y_FE)

  • There will always be a level of frictional unemployment

  • This makes it impossible to achieve 100% employment

• Different economies have different rates that are considered to be close to the full employment level of labour e.g. Japan’s level is about 2.5%

• 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.%

• 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

• The UK has 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

• 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 Equilibrium 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 current account deficit

  • As a % of GDP the UK current account deficit is insignificant so has not been problematic