Government policy objectives Unit 2

Economic growth. Unemployment. Balance of payments. Inflation. Exchange rates.

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  • Created on: 24-05-11 11:54
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Economics Revision
Government policy objectives:
1. Steady + Sustainable economic growth
2. Inflation (target 2.0)
3. Low unemployment
4. Balance of payments (high exports, low imports)
1. Economic Growth: Short run increase in real GDP. Long run increase in productive
capacity (maximum output the economy can produce).
GDP: the value of outputs of goods and services produced in a country during a year.
Real GDP: growth in output adjusted for inflation
Potential growth: overall capacity of the economy (e.g. what the economy can produce with
all its resources)
Actual growth: annual percentage increase in output
Nominal growth: growth in output not including any price changes expressed at `current prices'
Real growth: growth in GDP adjusted to take account of changes in the price level
Sustainable economic growth: growth that continues over time and does not endanger future
generation's ability to expand productive capacity
Trend growth: Expected increase in potential growth over a period f time. A measure of how
fast economy can grow without causing inflation.
Causes of growth
1. Investment
2. Increase in consumption
3. Technological advances
4. Education and training
Benefits of growth Drawbacks of growth
Increase in living standards More pollution, destroy natural resources
Reduce poverty ­ increased output, Work longer hours under stress, learning new
households can enjoy more goods and skills (opportunity cost)
services People may not feel happier with more goods and
More choices ­ can retire earlier and services
have leisure time Inequalities of income and wealth ­ not all the
Increased economic status and power benefits are evenly distributed
More employment and income Regional disparities ­ big gap between rich and

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Potential environmental benefits ­ richer
countries have more resources
Human capital: Increase in
education and training so
workers have more skills to
produce more
Measuring economic growth:
1. Income method ­ all incomes (wages, rent, interest, profit) are all totaled
2. Output method ­ measures output produced by all industries
3. Expenditure method adding up all spending on the country's finished product
1. Only income that have been earned in return for providing goods and services are included
2. Avoid double counting
3.…read more

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Anticipated inflation ­ government can prepare for it
Unanticipated inflation ­ cant take precautions
Inflation rate: A sustained rise in price level measured in percentage terms
Measuring inflation:
1. CPI: a measure of changes in the price of a representative basket of consumer goods and
2. RPI: a measure that is used for adjusting pensions and other benefits to take account changes
in inflation
RPIX = RPI ­ mortgage interest payments
RPIX = RPI ­ mortgage indirect taxes
1.…read more

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Causes of unemployment:
Frictional unemployment: short term unemployment occurring when workers are
inbetween jobs
Seasonal unemployment: unemployment caused by seasonal changes in labor supply and
demand during the year
Search unemployment: not accepting the first job that comes along, seeking better pay
Casual unemployment: frequently out of work between periods e.g.…read more

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Fall in exchange rate
o Fall in inflation rate
o Rise in labour productivity
o Rise in quality of products
o Rise in income abroad
o Fall in domestic income
Consequences of a ..…read more

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Budget deficit: government spending > tax revenue
Budget surplus: government spending < tax revenue…read more


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