Performance Of The UK Economy And Government Policy Objectives

1. Performance Of The UK Economy And Government Policy Objectives

2. Content • Indicators Of National Economic Performance • The objectives of government economic policy • Economic growth • Inflation • Employment / Unemployment • Balance of payments

3. Indicators Of National Economic Performance • Key Indicators: • Economic growth • Inflation • Employment / Unemployment • Balance of payments • These allow you to compare the performance of over time and between countries and areas

4. The objectives of government economic policy • Economic objectives are what the government wants to achieve and include: • Stable prices (low inflation) • Steady and sustained economic growth • Low unemployment or full employment • A balanced balance of payments

5. Factors that influence governments ability to achieve objectives • Availability of factors of production • Productivity of factors of production • Technology • Amount of trade between UK and other countries • Macroeconomic policy • Laws and legal system • Geography

6. Conflicts between objectives • Healthy Growth and low inflation – when economies grow too quickly demand exceeds supply leading to a rise in prices • To keep inflation low the government uses tools like high interest rates which can deter economic growth • There is a trend rate of growth in the economy of 2 ½ - 3 % which is believed not to spark inflation

7. Healthy Growth and Balance of Payments Equilibrium • When the economy grows quickly consumption is high and British consumers have a tendency to spend their money on imports • This leads to a larger balance of payments deficit

8. Low unemployment and low inflation • Phillips curve shows an inverse relationship between unemployment and inflation • When the government decreases interest rates or increases public expenditure to decrease unemployment this will push wages higher therefore increasing prices and causing inflation • However measures to control inflation e.g. high interest rates and decreases public spending increase unemployment rates

9. Other conflicts • Healthy growth and the environment – the more rapid the rate of growth the greater the level of production and the increase in levels of pollution etc • Healthy growth and equality – when an economy grows it is often the rich that benefit and the poor that suffer creating more inequality in the country

10. Economic Growth • Economic growth is where the productive capacity of the economy is increasing • The principal indicator of economic growth is the rate of change for real national income • Real national income takes into account the impact of inflation on the growth rate

11. Economic Growth And PPF • Economic growth has caused a shift in the original PPF from PPF1 to PPF2 • This shift means more of all goods are now able to be produced in the economy

12. Rate of Economic Growth • Rate of economic growth is influenced by: • Labour supply • Productivity of labour • Productivity of capital • Investment in capital • Technology • Resource availability • The key to improving the rate of economic growth is to improve the factor productivity of factors of production

13. Supply side policies and economic growth • Supply side policies can be used to attempt to influence the underlying long term trend of economic growth • Be moving the LRAS curve outwards these policies aim to increase the level of economic growth in the country

14. Inflation • Inflation- A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money caused by an increase in available currency and credit beyond the proportion of available goods and services. • Over the long term, inflation erodes the purchasing power of your income and wealth. That means that even as you save and invest, your accumulated wealth buys less and less.

15. How to measure inflation • Every month the Government surveys prices and generates the current consumer price index (CPI) • This allows you to compare current figures with past figures

16. The causes of inflation • Inflation results when the macro economy has too much demand for available production. • Demand-Pull Inflation: This inflation occurs when the government / consumers / business try to purchase more output than the economy is capable of producing. • Cost-Push Inflation: Cost-push inflation is inflation due to decreases in supply, primarily due to increases in production cost

17. Inflation and Governmental Policy • Governments try and control inflation using the following tools: • An increase in interest rates • Legislation reducing trade union power • Reduced expectations of inflation allowing businesses more confidence when setting prices • The bank of England tries to control the rate of inflation by using interest rates to try and prevent aggregate demand increasing more rapidly than the underlying trend in growth

18. Deflation • Deflation occurs when there is a fall in the general level of prices • Deflation can happen in the whole economy or in specific sectors of the economy • Deflation may be due to an increase in technology which has meant costs have decreased and these have been passed on to the consumer • In January 2007 there was deflation in the UK grocery market as the price of many foods decreased

19. Unemployment • There are a number of types of unemployment: • Structural unemployment • Cyclical unemployment • Frictional unemployment • Structural unemployment occurs when the economy changes and industries die out • Training is needed to give the unemployed workers new skills

20. Unemployment • Cyclical unemployment is caused by the business cycle • Frictional unemployment is caused when people are temporarily out of work as they are moving jobs

21. Unemployment and Businesses • Increasing levels of unemployment can cause problems for firms • Cyclical unemployment can lead to a decrease in sales meaning businesses need to look for new markets • Structural unemployment can affect businesses in the local area

22. Unemployment and PPF • Unemployment means that scarce economic resources are being wasted reducing the long run potential of the economy • Where there are high levels of unemployment an economy will be operating inside the perimeters of its PPF

23. Unemployment and AD / AS • As Aggregate demand increases unemployment will decrease • Supply side policies can be used to increase aggregate supply in the economy and thereby reduce the level of unemployment • However if the growth in the level of aggregate demand is less than the underlying trend growth in output unemployment is likely to occur

24. Output Gap And Unemployment • The output gap measures the difference between potential and actual GDP • If the output gap is high there will be high unemployment and low inflation • If the output gap is small there is likely to be low unemployment but high inflation as the economy is nearing its productive capacity

25. Balance Of Payments On The Current Account • The balance of payments account records transactions between the UK and other countries • The current account is made up of: • Trade in goods • Trade in services • Investment incomes • Transfers

26. Balance of Payments Account • A surplus means that the total value of exports (goods / services produced in the UK sold abroad) exceeds the amount of imports (goods / services produced overseas and sold in the UK) • A deficit means the total value of exports is less than the total value of imports

27. Summary • Indicators Of National Economic Performance are used to compare countries • The key objectives of government economic policy are to have sustainable economic growth, low inflation, low unemployment and a balanced balance of payments • Economic growth refers to an enlargement of productive capacity in an economy • Inflation is a rise in the general level of prices • Employment / Unemployment measures the amount of people out of work • Balance of payments looks at the value of all imports and exports into an economy