26 National economic performance

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Key points:

The macroeconomic performance of an economy can be judged on its rate of economic growth, unemployment, inflation and its current account balance on the balance of payments

The macroeconomic objectives of government include high economic growth, low unemployment, low and table inflation and a balance of payments equilibrium on current account

Macroeconomic objectives also include limiting fiscal deficits and high include objectives on income inequality and the environment

Microeconomics and macroeconomics:

Microeconomics: the study of individual markets within an economy

Macroeconomics: the study of the economy as a whole

National economic performance:

A reason macroeconomics is useful is because it tells us something about the performance of an economy

It also allows economists to compare there economy to the past

An economy is a system which attempts to resolve the basic economic problem of resource scarcity in a world of infinite wants

An economic system is a mechanism for deciding what is to be produced, who is receiving the benefit and how production will take place

When judging economic performance, a criteria is to consider how much is being produced. The more being produced, the better the economic performance.

Another criteria is other resources are being fully utilised. For example, if there are high levels of unemployment, the economy can't be producing at its potential level of output. It also brings poverty to those unemployed and affects their standards of living.

The rate at which prices rise are also important. High rates of price rises disrupt normal working of an economy.

A national economy must also live within it's means. The value of what it buys from other economies must roughly equal what it sells. (e.g. A household can't forever overspend and accumulate debts)

Economic growth:

1 key measures of national economic performance is the rate of change of output (economic growth)

The measure used to calculate output is called gross domestic product (GDP)

GDP: the monetary value of all finished goods and services in a country's borders in a specific time period

Economic growth is generally desirable as individuals prefer to consume more rather than few goods and services (based on the assumption of infinite wants)

Higher e.growth is therefore better than low e. growth

Recession or depression: a period when the economy fails to grow or output shrinks, the economy is performing poorly

Boom: a period when the economy it doing well with e.growth about its LR average

Unemployment:

Unemployment is a big problem in society as it represent a waste of scarce resources

Output will be higher if those unemployed were in work

It also leads to poverty for those out of work

SO high unemployment is an indicator of poor national economic performance

Alternatively, low unemployment is an indicator of good economic performance

E.growth and unemployment tend to be linked --> fast growing economies tend to have low unemployment as more workers are needed to produce more goods and services.

If e.growth is negative and the economy is in a recession, firms will lay off workers so there is a rise in unemployment

Fast e.growth tends to leat to net job creation -> more jobs will be created than lost

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Inflation:

Inflation: the increase in average prices in an economy

Low inflation is generally seen to be better than high inflation

Because inflation has a number of adverse effects. For example, rising prices mean the value of what savings can buy falls

Inflation also disrupts knowledge of prices, if there is high inflation, consumers often don't know a reasonable price for the item they want

Inflation of around 2-3% is desirable. Anything above 5% us worrying

Some countries are faced with deflation (falling prices)

Deflation makes it difficult for a country to grow its GDP so deflation and recessions are linked

The current balance:

Value of imports: a nations spending on foreign goods and services

The country earns money to pay for those imports by selling exports to foreigners

If the value of imports is greater than exports, it must be financed by either borrowing or running down savings abroad

If imports are significantly greater than exports, the country could face difficulties

Account surplus: when exports are greater than imports

Account deficits: when imports are greater than exports

Deficits are a problem when foreign banks and lenders refuse to lend any more money. Countries then have to respond to increase confidence which us likely to involve cutting spending which leads to less demand for imports. This does lead to lower economic growth and rising unemployment.

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Government objectives:

Different economies work in different ways. What is possible for the UK economy may differ from what is possible for the Chinese economy.

Typically, governments have macroeconomic objectives relating to 4 variables:

Economic growth

Unemployment

Inflation

Current account on the balance of payments

They will also have objectives in relations to govt. budgets, the environment and income inequality

Economic growth:

Govt. attempt to maximise the growth rate of their economies.

For low and middle income countries (China, Uganda, Brazil) it can be possible to reach annual growth rates of up to 10% or higher.

How high income countries (UK, USA, Germany) a growth rate of 2.5% is possible

High rates of growth in low and middle income countries can be achieved (Example: move many workers from low-productivity agriculture to high-productivity manufacturing)

Using modern technology also significantly increases output per worker

Higher income countries have already been through an industrialisation process so cannot develop technologically any further yet.

Many high income countries also face a rapidly ageing population where the n. of workers in the economy is falling.

Unemployment and employment:

Govt. would like to see unemployment as low as possible without there being inflationary pressure in the economy

It is impossible to have 0 unemployment in an economy as there is ALWAYS seasonal and frictional unemployment

A 5% unemployment rate is seen as a considerable policy achievement

Recent govt. have been keen to expand unemployment as higher employment, increases tax revenues and reduce welfare benefits

Inflation and deflation:

Central banks and govt. in the industrialised economies have set inflation targets to around 2% -> it is low but positive inflation

Higher inflation is seen as undesirable due to fear the inflation will just keep rising

BUT govt. want to avoid deflation as it is linked to recession and low or negative e. growth

The balance of payments on current account:

Govt. aim for the balance of payments on current account to balance over time

Economies where the account is in consistent surplus are seen to be 'strong' economies whilst those on consistent deficits are 'weak' economies

BUT countries can run on persistent surpluses and still have low e. growth rates and others can run on persistent deficits and grow very fast with no significant economic problems

Very large current account deficits can be very dangerous. They are measured as a % of GDP

If borrowers in countries with large deficits can no longer repay their loans, there will be an economic crisis and a sudden large fall in GDP

Government budgets:

Following the financial crisis of 2008, many countries saw their fiscal deficits growing to over 10%, this is unsustainable in the LR as govt. have to borrow far more money than they expect to repay in the future.

In the short term, large fiscal deficits which increase the national debt as sustainable as long as the fiscal deficit is reduced to manageable levels over time.

Some economists argue that fiscal deficits should be cut ASAP even if it means low e. growth and significant increases in unemployment

Others argue that cutting fiscal deficits at a slower pace is better as it allows the economy to grow faster leading to a quicker rebound in tax revenues and fall in welfare payments.

The environment:

Environmentalists argue that increased economic activity will damage the planet

Pro-growth economists ten to argue that increases in output and improvements in technology allow economies to clean up their environments and reduce pollution

Income distribution:

Right-wing economists and politicians tend to argue that inequality is positive as it increases incentives to work and take economic risks. In turn it leads to increases in economic growth, raising the society incomes. Therefore, they are against policies which reduce inequalities, particularly increases in tax on higher earners and businesses.

Left-wing economics and politicians tent to argue that, due to fairness, everyone in society should have access to a certain standard of living and free markets lead to high levels of inequality. So, govt. need to intervene to reduce inequality. They can intervene in markets by setting min. wages or mx. prices for essentials. They can also provide free health care and education and fund by raising taxes, particularly on high earners. Left-wing economists tend to argue that high levels of inequality are not correlated to economic growth. Individuals work and take risks even if marginal rates of tax are high