Macroeconomic objectives and indicators

Summary

This video explores the key macroeconomic objectives that governments pursue: economic growth, low unemployment, price stability, and balance of payments stability. It explains how economic growth is measured through real GDP and per capita GDP, while unemployment is tracked by benefit claims or labor force surveys. Price stability is assessed using inflation rates, typically targeted around 2% in the UK. The balance of payments focuses on managing trade deficits and surpluses. These objectives are crucial for improving living standards and maintaining a stable economy, with each objective measured by specific indicators to gauge performance.

Takeaways

• 😀 Economic growth is a key government objective, focused on increasing the output of the economy to improve living standards.
• 😀 Real GDP (Gross Domestic Product) is used to measure economic growth, adjusted for inflation to reflect actual increases in output.
• 😀 Per capita GDP, calculated by dividing real GDP by population, helps better understand changes in living standards.
• 😀 A government's goal is to achieve a percentage increase in real GDP, representing economic growth.
• 😀 Reducing unemployment is another important objective, aiming to have as many people employed as possible.
• 😀 Unemployment can be measured by counting the number of people claiming unemployment benefits or through labor force surveys.
• 😀 Price stability, defined as low and stable inflation, is a third key government objective.
• 😀 Inflation is measured using the Retail Price Index (RPI) or the more commonly used Consumer Price Index (CPI), with a target of around 2% in the UK.
• 😀 The Bank of England is responsible for managing inflation, ensuring it stays close to the 2% target.
• 😀 Stability in the balance of payments on the current account is crucial, avoiding large surpluses or deficits in trade and financial flows.
• 😀 The balance of payments records financial flows, particularly focusing on payments for imports and exports, which should be in equilibrium.

Q & A

What is the primary goal of economic growth from a government perspective?

The primary goal of economic growth is to increase the output produced by the economy, which helps to improve living standards.

How is economic growth typically measured?

Economic growth is measured by real GDP, which stands for Gross Domestic Product adjusted for inflation. This shows actual increases in output, not just price changes.

Why is real GDP adjusted for inflation?

Real GDP is adjusted for inflation to account for the actual increase in the value of output, excluding the effect of rising prices.

What is per capita GDP, and why is it useful?

Per capita GDP is the total GDP divided by the population. It provides a clearer indication of changes in living standards by showing output per person.

What is the second macroeconomic objective outlined in the script?

The second objective is reducing unemployment, with the goal of achieving as low a level of unemployment or as high a level of employment as possible.

How is unemployment measured?

Unemployment is measured by counting the number of people claiming unemployment benefits or through labor force surveys to identify individuals who are willing and able to work but are unemployed.

What is price stability, and how is it measured?

Price stability refers to keeping inflation, the rise in average price levels, under control. It is typically measured using the Consumer Price Index (CPI) or the Retail Price Index (RPI).

What is the inflation target in the UK, and which institution is responsible for maintaining it?

In the UK, the inflation target is around 2%, and the Bank of England is responsible for maintaining this target.

What is the balance of payments, and why is it important for governments to monitor it?

The balance of payments records financial transactions, particularly the current account, which tracks payments for imports and exports. Governments monitor it to avoid persistent deficits or surpluses.

How does the balance of payments differ from the budget balance?

The balance of payments tracks international financial flows, including imports and exports, while the budget balance records the difference between government spending and revenue from taxation.