Possible Macroeconomic Objectives

What Macroeconomic Objectives Are

Macroeconomic objectives: the goals a government sets for the performance of the whole economy.

The government sets them, and the Bank of England is in charge of inflation. The tools both use are in unit 2.6.2. The objectives often pull against each other, which is unit 2.6.3.

Governments have other aims too, such as a sound budget, a fairer spread of income and protecting the environment. The spec names these four.

Economic Growth

Economic growth is a rise in real GDP, the economy's output adjusted for inflation (unit 2.5.1). Steady growth is the aim, because growth far above trend tends to end in rising inflation and then a downturn.

Growth matters because:

• Firms: real GDP rises → households and other firms spend more → higher sales and profit → more reason to invest in new capacity.
• Households: more output → more jobs and rising pay → higher real incomes and living standards.
• The government: higher incomes and profits → more tax revenue at the same tax rates → more to spend on schools and hospitals, or less borrowing.

Low Unemployment

Unemployment counts people who want a job and are looking for one but don't have one (unit 2.5.4). It can never reach zero, because at any moment some people are moving between jobs.

Low unemployment matters because:

• Individuals: a job → a wage instead of benefits → higher income, and skills kept up to date.
• Firms: more people in work → more customers with money to spend → higher sales. But staff get harder to find, which pushes up wages.
• The government: fewer people out of work → less spent on benefits and more income tax collected → a smaller budget deficit.

Low and Stable Inflation

The government sets the Bank of England a target of 2% CPI inflation, and the Bank sets interest rates to hit it (unit 4.5.3). Both words in the objective count:

• Low: prices rise slowly → wages and savings keep their value → real incomes hold up, and UK goods stay competitive abroad (unit 2.5.3).
• Stable: firms can predict their costs and prices → they can plan, sign contracts and agree pay rises with confidence → more investment.

The target is 2%, not zero. Falling prices bring their own problems: households put off buying in the hope of lower prices later, and firms' sales fall.

Balance of Payments Equilibrium on the Current Account

Balance of payments: the record of all money flowing into and out of a country from its dealings with the rest of the world.

Current account: the part of the balance of payments that records trade in goods and services, plus income such as profits and interest earned abroad and transfers such as foreign aid.

If more money flows out than in, mainly because imports are worth more than exports, there is a current account deficit. More flowing in than out is a surplus. Equilibrium means a balance that is close to even over several years, not exactly zero in each one.

A large, lasting deficit is a problem because:

• It has to be paid for: a deficit → the country borrows from abroad or sells assets to foreign buyers → future interest and profits flow overseas.
• It can mean lost jobs: households buy imports instead of UK goods → UK producers lose sales → fewer jobs in manufacturing and other traded industries.

The UK has run a current account deficit every year since 1984. How much that matters depends on:

• What the imports are: imported machinery that raises output later is easier to justify than spending on imported consumer goods.
• How it is financed: foreign firms building factories in the UK bring jobs, while short-term borrowing can leave the country quickly.

A large surplus is not the aim either: it means other countries run matching deficits, and they may respond with tariffs.