Chapter 3 Flashcards
Primary government objectives
Maintaining FULL EMPLOYMENT
Ensuring PRICE STABILITY
Achieving ECONOMIC GROWTH
Having a BALANCE OF PAYMENTS
Maintaining full employment
This means that the government is attempting to ensure that every citizen who is willing and able to work
has a paid job. This involves supporting businesses to ensure that they can employ people and helping
individuals to attain the skills that they need to become employable
Ensuring price stability
it is very common for prices to rise continually – this is not a problem if the price rises are expected by
individuals and firms, as wages can rise to compensate for such price rises. However, if prices change
at a rate that is unplanned then uncertainty can be created in the economy. This uncertainty can lead to businesses reducing their investment and for individuals to lower their spending and consumption.
Achieving economic growth
The government wants the economy to be constantly growing so that individuals have growing incomes
are becoming wealthier. Through economic growth the government is able to provide more and more public
services to the population
having a balanced current account on the balance of payments
In its simplest form the balance of payments is a record sheet showing the flows of money in to and out
of a country. The current account section of the Balance of Payments has details of how much the UK
spends on foreign goods and services (imports) and how much the country receives from foreign countries
when they purchase UK domestic goods and services (exports). The objective is to ensure that the flows
of money going out of the UK are BALANCED with the flows of money coming in to the UK in the current
account.
What is the exact range of what the UK wants to the unemployment rate to be
±4%
An inflation rate of exact range the uk wants
2% (±1%)
What economic growth at a sustainable level does the uk gov want
2.5%pa
The uk gov wants a current account that is
not permanently in deficit
Secondary government objectives
reducing inequality
managing environment change
Reducing Inequality
attempting to achieve a smaller gap between the lowest paid and highest paid
workers in the economy, as well as reducing the gap between the least wealthy and the most wealthy
households
Managing environment change
most governments now recognize that much of the environmental
damage to the planet is caused by human economic activity
Achieving Full Employment vs Price Stability
The government may implement a policy to prevent prices rising too quickly (e.g. increasing income tax so that
people spend less) which in turn reduces demand within the economy. This fall in demand leads businesses
to reduce their output and potentially make some (or all) of their employees redundant, causing greater
unemployment
Achieving Economic Growth vs Price Stability
Stable prices may not encourage businesses to increase output as there is no incentive to increase profit levels
at higher prices. The same businesses may feel unable to increase the wages of their employees. In this case,
growth for the entire economy may not match the objective of the government
Achieving Economic Growth vs Balance of Payments
If economic growth is positive, then individuals should earn higher incomes as businesses grow and more
workers are employed. In the UK consumers are more likely to purchase goods and services (rather than
increase their savings) as their incomes grow, and often this increase in consumption is on goods and services
from abroad. This is because many of the goods that we consume in the UK are purchased from abroad where
they are often produced at a cheaper rate than if they were made in the UK. This increase in spending on foreign
goods is likely to increase the imbalance in the current account.
