Economics IGCSE Edexcel - Macroeconomic Objectives

Macroeconomic Objectives: The aims of the government for the entire economy

Economic Growth: the increase of national income, output or production in the economy overtime.

The most common measure for this is Gross Domestic Product (GDP) which measures the country's total output. It is the internationally recognised estimate of economic growth.

Limitations of GDP:

1. Does not take into account inflation. This can be solved by using real GDP which takes into account inflation.
2. Does not take into account of population changes. This can be solved by using GDP per head.
3. Statistical errors will be made.
4. Does not include the hidden economy or home produced goods.
5. Does not take into account quality of products.

The Economic Cycle:

1. Boom- national growth rises quickly with wages and profits rising. However, prices might also rise.
2. Downturn- the economy grows at a slower rate with demand falling and unemployment rising.
3. Recession- a continued fall in national output.
4. Depression- a more serious recession with a significant fall in economic growth. Business confidence is very low, unemployment rises sharply.
5. Recovery- GDP starts to rise again, demand starts to rise again, and unemployment begins to fall.

Inflation: a general and persistent rise in prices over a period of time.

Consumer Price Index (CPI): hundreds of different products are each tracked to see the average change in price.

Retail Price Index (RPI): this is the same as CPI only including house prices, mortgages and council tax.

Causes:

1. Demand Pull- if aggregate demand (total demand in the economy) rises then inflation may occur as firms are unable to increase supply at the same rate. If demand is higher than supply, then price rises.
2. Cost push- an increase in cost of production will cause firms to increase prices to prevent loss of profit.
3. Money supply- if the increase in money supply is faster than the increase in production, then inflation will most likely occur. This is because demand rises with money supply.

Consequences:

1. Purchasing power- if prices rises faster than wages, purchasing power falls. As a result, people's living standards fall.
2. Savings- the value of savings fall.
3. Prices- price rises means people may not be able to afford somethings.
4. Wages- demand for higher wages rises as people try to maintain their living standards.
5. Unemployment- rises as increase in wages means higher costs.
6. Balance of payments- demand for exports fall means a deficit forms.
7. Function of money- under hyperinflation, money ceases to be a function of exchange with people preferring to use commodities, monetary value becomes distorted and people become uncertain about the value of goods.

Unemployment:

Measured by the International Labour Organisation (ILO) which takes a sample of people. You are classed as unemployed if:

1. You've not been working for four weeks and
2. You are able to start work in two weeks and
3. You want to work.

Types of unemployment:

1. Cyclical- caused by an economic downturn or recession where aggregate demand is falling.
2. Structural- unemployment caused by a decline in a certain industry. E.g. UK vehicle production.
3. Seasonal- unemployment caused by industries that only function at certain times of the year. E.g. tourism.
4. Frictional- short term unemployment where a person moves from one job to another. This can take up to eight weeks.
5. Voluntary- where workers decide to not participate in the workforce because of low wages, generous welfare benefits or high rates of income tax.

Balance of Payments on the current account:

This is measured by adding together visible and invisible imports and taking it away from visible and invisible exports.

visible exports + invisible exports-visible imports-invisible imports

Visible trade is the exchange of actual goods.

Invisible trade is the exchange of services.

A deficit in the balance of payments on the current account is where there are more imports than exports while a surplus means the opposite.

Protection of the environment:

Recently, with growing knowledge about the dangers of climate change and global warming, governments have become more concerned with the protection of the environment.

They have tried to limit this in many ways:

1. Government regulation- prevents companies from causing excessive damage to the environment.
2. Taxation- this insures that the social cost is met by those who created those externalities.
3. Subsidies- this provides an incentive to reduce environmental damage and award firms that creates positive externalities.
4. Recycling- may counter some of the negative externalities.