Economic Performance

What the spec says we need to know about...

• The Objectives of Government Economic Policy
• Economic Growth
• Inflation and Deflation
• Employment and Unemployment
• The Balance of Payments on Current Account

The objectives of government economic policy

Governments have several objectives, but there are four main macroeconomic objectives they're trying to achieve:

• Strong economic growth
  • Governments want economic growth to be high (but not too high)
  • In general, economic growth will improve the standdard of living in a country
• Keeping inflation low
  • In the UK, the government aims for inflation of 2%
  • The Monetary Policy Committee of the Bank of England uses monetary policy to achieve this target rate
• Reducing unemployment
  • Governments aim to reduce unemployment and move towards full employment
  • If more people are employed then the economy is more productive. Aggregate demand will also increase as more people will have a greater income
• Equilibrium in the balance of payments
  • Governments want equilibrium in the balance of payments, i.e. they want earnings from exports and other inward flows of money to balance the spending on imports and other outward flows of money
  • This is more desirable than a long-term deficit or surplus in the balance of payments- which can cause problems

Economic growth

Economic growth is an increase in the productive potential of an economy.

In the short run, economic growth is measured by the percentage change in real national output. This is known as actual growth (this just means that the effect of inflation has been removed from the growth figure).

Increases in actual growth are usually due to an increase in aggregate demand, but they can also be caused by increases in aggregate supply. Actual growth doesn't always increase- it tends to fluctuate up and down.

Long run growth (also known as potential growth) as caused by an increase in the capacity, or productive potential, of the economy. This usually happens due to a rise in the quality or quantity of inputs (the factors of production). E.g. more advanced machinery or a more highly skilled labour force.

Long run growth is shown by an increase in the trend rate of growth. The trend rate of growth is the average rate of economic growth over a period of both economic booms and slumps. It rises smoothly rather than fluctuating like actual economic growth, so the actual rate of growth often doesn't match the trend rate.

Increases in long run growth are caused by an increase in aggregate supply.

A production possibility frontier (PPF) can show economic growth. Short run and long run economic growth can be shown with a PPF.

Short run growth occurs when there is spare capacity (unused or underused resources). Therefore short run growth can be shown by a movement from a point within the PPF, to a point on the PPF.

Long run growth occurs if there's an increase in the capacity of the economy- this would make the PPF shift outwards.

Economies go through cycles of different rates of growth. Economies tend to…