Basic Macro Objectives

This part is short and sweet, and talks about what the government wants from the economy. From ‘Controlling The Economy Governments Role’, we have some assumptions, and this is what we talk here. What does it control an economy for?

To achieve it’s objectives!…………..What are those then??………..Well read this!

What a rational government wants….

We are talking one which acts in the best interests of the population, not one which sends in tanks to villages or is corrupt to the core, taking bribes from associates(a government failure).

Sustainable Economic Growth..  A good economy is not one which is shrinking. To reduce absolute poverty, to increase ideas/opportunites/tax revenues to play with, the economy(in GDP) needs to grow. A long term rate with no asset bubbles depends on what stage of development we are talking. But for the UK, about 4% per year is the target growth rate.

Creeping Inflation….. Prices rise by the actions of an economy full of animal spirits, and ways of avoiding this can be catastrophic. But inflation when out of control is very damaging, which I will explain why on another spread(all we have to do is look at the state of Zimbabwe’s economy and 1920’s Germany). What we want is a fairly constant % price rise YOY, UK’s aims by the Monetary Policy Committee is 2-4%

Low Unemployment….. (As Ray Powell of AQA textbooks says) ‘As I have already explained’, unemployment is waste, and a rational government wants to keep this to a minimum. Zero unemployment is not possible, so we want to be around the natural rate of unemployment and make policies to cut this natural rate. UK around 3-4% aim.

A non destructive Current Account Balance…. If there is too large a deficit, there is a lot of income flowing out of the economy, not good! However, a capital account which comes with it can offset income losses by job creation and equity. Whatever the aim is on this depends on what comparative advantage you’re economy has. The UK has a persistent trade deficit, but London is the worlds financial capital and an investment hub, so not too bad.

That is all you need to know for AS, but for A2, there are a few more………….

A Balanced Government Budget was an old aim for the UK economy which has gone out of the window. Keynesian demand management by government spending in downturns looked at deficits in a more positive light. In recent years, the UK objective was a total government debt(sum of all unpaid deficits) less than 40%. A rational economy wants a balanced budget over time.

Inequality, some is healthy: it is measured by ‘Gini coefficients’ (see restributing income). Generally, so long as there is nobody starving with a lack of education/healthcare than inequality is a healthy result of a reward for work culture. UK inequality has steadily rose, up to a coefficient of 0.36. Any below 0.45 is seen as okay(generally progresses over time).

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One Response to Basic Macro Objectives

  1. Pingback: Thinktank « Zahablog's Economic Page

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