The Five Macroeconomic Aims (Cambridge International IGCSE Economics)

Economic Growth

Spec point — 4.2.1 · Economic growth, full employment/low unemployment, stable prices/low inflation, balance of payments stability, redistribution of income. Reasons behind the choice of aims and the criteria that governments set for each aim.

• Economic growth is a central macroeconomic aim of most governments

• Many developed nations have an annual target growth 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

A diagram showing the economic growth rate of the UK since 1998 Source: Macrotrends

A Table Highlighting Some of the Economic Growth Trends in the UK Since 1998

Low Unemployment

Spec point — 4.2.1 · Economic growth, full employment/low unemployment, stable prices/low inflation, balance of payments stability, redistribution of income. Reasons behind the choice of aims and the criteria that governments set for each aim.

• Someone is considered to be unemployed if they do not have a job and are actively seeking for one

• The target unemployment rate often depends on the size of the economy e.g. India finds a rate of 6.5% good whereas Singapore aims for it to be under 2%

• The closer an economy is to the **full employment level **of labour, the better (more efficiently) it is using its human resources

• 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 USA was 8.7% and white unemployment was 4.7%

A diagram showing the unemployment rate in the UK from 1998 - 2020 Source: Macrotrends

• Unemployment tends to be inversely proportional to real GDP growth

  • When real GDP increases, unemployment falls
  • When real GDP decreases, unemployment rises

• Unemployment in the UK remained relatively high for the six years following the global financial crisis of 2007

Low and Stable Rate of Inflation

Spec point — 4.2.1 · Economic growth, full employment/low unemployment, stable prices/low inflation, balance of payments stability, redistribution of income. Reasons behind the choice of aims and the criteria that governments set for each aim.

• Most economies have 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

A diagram illustrating the inflation rate in the UK from 2012 to 2021 using the CPI

• In the UK, a continual deviation from the target of 2% would not be considered as stable

  • An inflation rate in April 2022 of 4-5% was considered to be unstable, eroding household purchasing power

• A low and stable rate of inflation is important as it

  • Allows firms to confidently plan for future investment
  • Offers price stability to consumers

Balance of Payments Stability on the Current Account

Spec point — 4.2.1 · Economic growth, full employment/low unemployment, stable prices/low inflation, balance of payments stability, redistribution of income. Reasons behind the choice of aims and the criteria that governments set for each aim.

• The Balance of Payments (BoP) for a country is a record of all the financial transactions that occur between it and the rest of the world

  • The current account focuses mainly on the financial transactions related to exports and imports of goods/services

• Governments aim for Balance of Payments equilibrium on the Current Account

  • If exports > imports it will create a current account surplus

  • If imports > exports, it will create a current account deficit

    • Each one of these conditions has advantages/disadvantages associated with it
    • However, a current account deficit is more problematic in the long-run

• The UK has traditionally run a small deficit

  • As a % of GDP the UK current account deficit is insignificant so has not been problematic

A diagram showing the UK Trade Deficit from 1998 to 2020. The bottom graph illustrates the trade deficit as a % of GDP and the top one illustrates the absolute value expressed in US$ Source: Macrotrends

• In the diagram above the trade deficit has been falling steadily since 2016

  • During this time period the value of exports was increasing slightly faster than the value of imports

The Redistribution of Income

Spec point — 4.2.1 · Economic growth, full employment/low unemployment, stable prices/low inflation, balance of payments stability, redistribution of income. Reasons behind the choice of aims and the criteria that governments set for each aim.

• The redistribution of income aims to reduce income inequality in an economy

  • High levels of income inequality create social unrest and can ultimately lead to revolutions
  • Perfect income equality is not desirable as it removes the incentive to work and study

• Governments aim to redistribute income by taxing the wealthy and providing welfare payments to the poor

• Unchecked capitalism has a natural outcome of high income inequality

  • The wealthy are able to keep buying factors of production
  • The concentration of ownership becomes more and more narrow with fewer individuals owning the bulk of the world's wealth

• There is a need for governments to intervene to maintain acceptable levels of income inequality

• Absolute poverty is usually worse in developing countries. However, in a developed economy such as Germany, a 1% increase in income inequality can push a lot more households into relative poverty