Performance Of The UK Economy

And Government Policy Objectives

 Content
• Indicators Of National Economic Performance
• The objectives of government economic policy
• Economic growth
• Inflation
• Employment / Unemployment
• Balance of payments
 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
 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
 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
 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
 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
 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
 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
 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
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
 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
 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
 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.
 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
 The causes of inflation
• Inflation results when the macro economy has too
much demand for available production.
1. Demand-Pull Inflation: This inflation occurs when
the government / consumers / business try to
purchase more output than the economy is
capable of producing.
2. Cost-Push Inflation: Cost-push inflation is inflation
due to decreases in supply, primarily due to
increases in production cost
 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
 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
 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
 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
 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
 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
 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
 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
 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
 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
 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