Government economic policy objectives and indicators of national economic performance

Government economic policy objectives and indicators of national economic performance

1. Macro objectives

   • Unemployment:low level of unemployment (willing and able to work at going wage rate in a suitable job but can't find work despite active search)
     • claimant count=measures unemplymt by counting no. of people claiming JSA on a particular day.
     • why? technology, disability, redundancy, discrimination, competition, lack of availability, inheritance, recession
     • types
       • structural=changing consumption pattens and technology reduces need for a certain type of work/er
         • strategies:provide housing/relocation, subsidised travel, subsidise firms, retraining programmes
         • causes:geograph/occupational mobility, skills for only 1 type of job, change in taste/pref
       • cyclical=from downturn in recession where AD in the economy is low so businesses have to make redundancies
       • frictional=moving between jobs in search of a more enjoyable job. redundant until job found
         • strategies:reduce benefits,encourage retraining,increase job awareness,increase link between employers/jobseekers (newspaper)
       • seasonal=in industries have fluctuations in demand at diff times of the year e.g. tourism
         • strategies: provide them w training, company links, encourage offseason work, increase info abt vacancies,reduce umemp benefits
     • full=where those wanting and able to work can find employment at the going wage rate- when only natural (frictional,seasonal,structural)
   • Price stability:low and stable rate of inflation(increase in price of goods over time/rate at which purchasing power falls)
     • nominal income=expressed at current prices
     • real income=after adjusting for inflation
     • cpi=lower inflation rates. rpi=includes mortgages and tax
     • hyperinflation=when inflation is considered to be out of control i.e. increasing at a rate greater than it usually would
     • causes
       • demand pull= increase in demand for products/services
       • cost push= rise in costs of input
     • consequences
       • shoe leather:cost of having to find best place to put money to maximise its return during high inflation
       • administrative:costs of having to readjust prices and accounts due to inflation (wage negotiation rises)
       • inflationary noise:distortion of prices as signal mechanism
       • random redist of income:people can gain/lose due to their bargaining power
       • fiscal drag:income dragged into higher tax bracket as not adjusted for inflation
       • inflation led inflation:hearing new of info cause it to happen now
       • loss of international competitiveness:causes exports to slow and imports to increase
       • menu:costs of having to reprint menus and price lists due to high inflation
   • Income redistribution:an equitable distribution of income
   • External stability:favourable balance of payments position
     • credit=money flowing into the UK
     • debit=money flowing out of the UK
     • current account surplus= imports<exports, outflow<inflow. the balance is positive
     • current account: trade in goods(exports and imports), income(profit going into UK,wage of foreign workers), current transfers(gift aid and grants)
   • Economic growth:steady rate of increase of national output

2. GDP:the total of all economic activity in a country, regardless of who owns the producive assets

   • Nominal gdp=the value of the country's outputs using today's prices
   • Calculating real gdp: ( Nominal deflator / GDP deflator ) x 100
   • Real gdp=the value of the couture's output after adjustments for inflation are made
   • causes for reduce in GDP despite more workers being employed
     • reduction in spending of disposable income
     • hidden unemployment (casual workers)
     • workers are less productive
     • underemployment (when you work below productive potential)

3. Economic growth measures

   • economic growth=increase in the amount of goods and services over time
   • economic development=standard/quantity of living in a country
   • deflationary gap=means that unemployment exists here
   • problems with measuring growth
     • output=double counting, value of raw material and the final product is counted
     • income=some people don't pa tax, benefit and transfer payments
     • expenditure=exp must be included, imp must be excluded
     • assumes no leakages/injections
   • production = goods that are manufactured
   • productivity=output of worker per hour

4. Exchange rates: value of one currency expressed in the form of another

   • floating exchange rate:forces of demand and supply for a currency determine the daily value of one currency against another
   • effect of appreciation in value of the £ on...
     • consumers=benefit from abroad being cheap
     • businesses=demand falls, cheaper abroad
     • inflation=low inflation>increased investment>fall in £
     • unemployment=increase; easier to employ people from abroad/lack of demand of foreign customers, net exports decrease
     • growth contracts
   • fixed exchange rate=value of one currency is fixed to value of another currency/avg value of selection of currencies
   • ER and export prices=to overcome strong pound:lower prices and costs,invest more,produce inelastic goods
   • factors affecting..
     • competitiveness of UK products=incr competition>low prices in UK than abroad>higher demand for £> value of £ depreciates
     • rising incomes abroad=more willing to buy UK goods > higher demand for £ > £ depreciates in value
     • rising domestic incomes=buy more from abroad > value of £ depreciates
     • rise in domestic interest rate=more foreign investment into UK > convert their money to save into UK banks > demand for £ inc > exchange rate increase
     • FDI=money into UK> increased demand for £> supply decreases> exchange rate increases
     • speculation=incr demand for currency (forecasting) > decrease in supply > exchange rate increases