government-macroeconomic-objectives

An Introduction to 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

Diagram: The Macroeconomic Objectives

• 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

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

• 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

Graph: UK Economic Growth Rates up to 2023

Growth trends 

• An increase in real GDP is a sign that the economy is expanding and employment is increasing

• A fall in real GDP (-11% in 2020) caused by Covid restrictions is a sign economy is contracting

• In 2021 and 2022, real GDP growth rate shows signs of recovery post-Covid restrictions

  • High inflation rates also occurred during this period 

UK Economic Growth Trends 2019–2022

Price Stability

• 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

Graph:UK Inflation Rates up to 2022

Inflation trends for 2015–2023

• In the period following the pandemic, inflation rates have exceeded the target rate of 2%

• The CPI peaked at around 8% in 2023

• This is due to supply chain disruptions causing cost-push inflation 

• Increased spending following the pandemic caused demand-pull inflation 

• The Bank of England (BoE) uses monetary policy to observe and regulate inflation rate

Minimising Unemployment Levels

• 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 

• 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 4.1% 

• Low levels of unemployment are a sign of a strongly performing economy and are inversely linked to real GDP growth 

  • When real GDP increases, unemployment falls

  • When real GDP decreases, unemployment rises

Graph: UK Unemployment Rates up to 2024