0455 · 4.1Government macroeconomic intervention

Macroeconomic aims and economic growth

0:00Imagine an economy where factories expand and more people find jobs. Household incomes rise, but prices climb, imports increase, and nearby rivers become polluted. Some government aims are being achieved while others come under pressure. Understanding these connections helps us judge economic success more carefully. We will explore six aims, the targets set for them, and three important conflicts. Macroeconomics is the study of the economy as a whole. It looks at total output, employment, prices and international payments.

0:29Government macroeconomic intervention is action by the government to influence these economy-wide outcomes. Here, our focus is on the results governments want to achieve. The tools used to pursue them belong in the videos on fiscal, monetary and supply-side policy. An aim gives the direction a government wants the economy to move. A criterion provides a standard for judging whether that aim has been achieved. For example, wanting low unemployment establishes an aim, while setting a maximum acceptable rate creates a measurable criterion.

0:58Each target also needs a time period, because improvements happen gradually. The target figures in this video are typical examples, and every government sets its own. Governments choose priorities partly because their economies face different problems. Widespread unemployment creates pressure to help people find work, while rapidly rising prices make stability more urgent. Severe pollution can strengthen the case for environmental protection. Public expectations and government views also influence priorities.

1:25The relative importance of an aim can therefore change over time. Gross Domestic Product measures the total value of output produced within a country over a given period. Real G D P removes the effect of price changes from that total. Economic growth is an increase in real G D P over time. It shows that the economy is producing more goods and services, measured at constant prices. Consider a country producing more food, transport services and medical care.

1:51Greater output can give people access to more goods and services. It can also increase government tax revenue, which helps finance public services. For example, a government might aim for real G D P to rise steadily by two to three per cent a year. A steady rate helps households and firms plan with confidence. The distribution of those benefits also matters. Additional output may mainly raise the incomes of people who already earn a great deal.

2:16Population growth can also spread the extra production across more residents. Governments therefore consider economic growth alongside their other aims. A rising total alone gives an incomplete picture of how people’s lives are changing.

Employment, inflation and external balance

2:27Full employment exists when everyone who is willing and able to work at the going wage rate has a job. People count as unemployed when they are actively looking for a job but do not have one. Governments often express this aim as low unemployment. Some workers spend time moving between jobs, so a practical target allows for this movement. A typical criterion is an unemployment rate below five per cent.

2:50Employment gives households an income from work and helps businesses use available labour. People can apply their skills to produce goods and services that others value. With fewer people out of work, the government spends less on unemployment benefits. Long periods without work can also erode skills and make the next job harder to find. Jobs therefore matter to individuals and to the wider economy. Another aim is stable prices, which also means low inflation.

3:14Inflation is a sustained increase in the general price level. When prices rise, a given amount of money buys fewer goods and services. A common example of a target is inflation of two per cent a year. That provides a clear benchmark for judging price stability. Predictable price changes help households plan their spending and businesses estimate future costs. Workers whose incomes rise slowly are especially vulnerable when everyday purchases become much more expensive.

3:38Low inflation protects what their earnings can buy. At a positive inflation target, the general price level still rises. The aim is a low, predictable rate of increase. The balance of payments records transactions between a country’s residents and the rest of the world over a period. Its current account records trade in goods and services, income flows and current transfers. Exports are sales of goods and services abroad, while imports are purchases from other countries.

4:03Governments seek balance of payments stability. A typical criterion is avoiding persistent large current account deficits. A country has a current account deficit when its payments to the rest of the world on this account exceed its receipts. Persistent large deficits must be financed by borrowing from abroad or by selling assets to foreigners. That makes the economy vulnerable if this financing becomes harder to obtain. Imports can still provide useful machinery, materials and consumer goods.

4:30Governments judge whether the pattern of international payments is sustainable over time.

Redistribution and environmental sustainability

4:34Redistribution of income means changing how it is shared between people or households. Its purpose is to reduce income inequality, where some households receive far more than others. Criteria could include a smaller gap between the highest and lowest incomes, or a larger share of total income for the poorest households. Governments set such targets because a wide gap can leave many families behind. People’s ability to meet essential needs depends heavily on their income.

4:58A society can produce substantial wealth while some households struggle to afford food or housing. Reducing inequality can improve access to basic goods and opportunities. Governments differ over the desirable extent of redistribution. They also consider how measures might affect incentives to work and invest. The last aim is environmental sustainability, which means meeting current needs without harming future generations’ ability to meet theirs. Resource depletion is the using up of natural resources such as forests, fish and minerals.

5:27Economic activity causes resource depletion and can damage air, water and habitats. Governments pursue this aim because present production decisions affect future wellbeing. Possible criteria are an emissions target, cleaner rivers, or slower resource depletion. A useful environmental target specifies what should change and by when. For example, a government could require a reduction in pollution from factories over a stated period. Monitoring the amount released would help judge progress.

5:53Cleaner production protects health today and preserves resources for tomorrow. In this way, sustainability links current economic choices with the opportunities available to future generations.

Judging macroeconomic performance

6:04Let us work through an example of judging these aims together. A fictional government uses the example targets for growth, unemployment and inflation described earlier. Real G D P grows by two point five per cent during the year. The unemployment rate is four per cent, while inflation reaches six per cent. We assess each result against its own criterion. The growth result lies within the target range of two to three per cent, so that criterion is met.

6:29Unemployment is below five per cent, which also satisfies the stated target. Inflation exceeds the two per cent benchmark, so price stability falls short. The evidence therefore shows a mixed outcome. A government can meet some criteria while missing another. These figures do not tell us why inflation rose. Stronger spending might have contributed, but higher production costs could also explain the result. We would need further evidence to establish the cause.

6:53Nor can this table establish success in redistribution, environmental protection or international payments. A sound judgement stays within what the information actually shows.

Conflicts between macroeconomic aims

7:03The possible conflict between full employment and stable prices begins with spending. When customers buy more, businesses have a reason to expand production. Firms recruit additional workers, which reduces unemployment. As available workers become scarce, firms compete for them by offering higher wages. Higher wage costs and strong demand can lead firms to raise prices, so inflation rises. This conflict is especially likely when the economy is already close to full employment.

7:28If many workers and machines are unused, extra spending can initially bring them into production. Output can then rise with less pressure on prices. The strength of the conflict depends on how much spare productive capacity exists. Higher employment and low inflation can therefore coexist under suitable conditions. Economic growth and environmental sustainability can conflict because extra output often needs more energy and raw materials. A factory producing more goods may burn more fuel and release more pollution.

7:55Greater extraction of minerals and timber speeds up resource depletion. If these activities damage health or reduce future supplies, growth comes at an environmental cost. The production method determines much of the effect. Cleaner technology can weaken that conflict. A business might increase output while using less fuel for each product. Services such as education and banking usually pollute less than heavy industry as they expand. Environmental protection can create work in areas such as renewable energy.

8:23Growth and sustainability are more compatible when production becomes cleaner and resources are used more efficiently. Another conflict links full employment with balance of payments stability. More people in work usually means higher household incomes. Some additional spending goes towards imported clothes, electronics or holidays abroad. Import payments then rise. If export receipts and other current account flows do not offset the change, the deficit can widen. The outcome depends partly on what creates the extra jobs.

8:51Firms expanding production for overseas customers may increase exports as they recruit. Domestic businesses might also supply goods that households previously imported. Those changes can offset higher import spending. The conflict is more likely when employment raises demand for foreign products without a matching improvement in current account receipts.

Exam technique and recap

9:10Examiners reward answers that give each aim its defining feature. Growth is measured with real G D P, because it removes the effect of price changes. Full employment still allows for some people moving between jobs. Inflation is a sustained rise in the general price level across the economy. For each conflict, set out the chain of cause and effect and the conditions that strengthen or weaken it. In multiple-choice questions, identify the aim described by the evidence.

9:35A target for factory emissions points towards environmental sustainability, while a target for household income gaps concerns redistribution. Structured questions require the response to match the command word. Define means give the precise meaning of a term, while state means express a point in clear terms. An explain answer sets out the reasons why or how an outcome occurs, and ends on that outcome. To analyse, examine the relationships in detail, such as the chain from employment through income to imports.

10:02Discuss questions need the issue written about in depth and in a structured way. They require both sides and a justified conclusion that uses the question’s circumstances. Consider this exam-style task: discuss whether achieving full employment will conflict with balance of payments stability. Full employment increases household incomes, so spending on imports can rise. Higher import payments widen the current account deficit if export receipts stay the same. However, jobs created by expanding export production increase receipts from abroad.

10:32On balance, achieving full employment will usually conflict with balance of payments stability, because higher incomes raise import spending quickly. Export receipts offset this only where many of the new jobs are in export industries. The six aims describe different aspects of economic success. Growth tracks real output, full employment reflects access to work, and stable prices mean low inflation. International payments must remain sustainable, while redistribution addresses income inequality.

10:59Environmental sustainability protects the ability of future generations to meet their needs. Governments select priorities and measurable criteria according to their circumstances. The central lesson is that these aims interact. Stronger spending can create jobs and price pressure, while rising incomes can increase imports. Additional production may damage the environment, although cleaner methods can reduce that cost. Judge each possible conflict through its causal chain and the conditions surrounding it.

11:25That approach turns a list of aims into an explanation of how the economy works.