An Introduction to Macroeconomic Objectives (SL IB Economics)

• Economic growth is a central macroeconomic aim of most governments
• Many developed nations have an annual target rate of 2-3%
  • This is considered to be sustainable growth
  • Growth at this rate is less likely to cause excessive demand pull inflation
• Politicians often use the economic growth rate as a metric of the effectiveness of their policies and leadership
• Economic growth has positive impacts on confidence, consumption, investment, employment, incomes, living standards and government budgets

The economic growth rate of the UK since 1998
Source: Macrotrends

Some of the Economic Growth Trends in the UK Since 1998

1998 - 2007	2008 - 2015	2016 - 2019	2020 -
Steady growth fluctuating between 2-4%	Global financial crisis followed by a rapid bounce back due to government intervention - and then steady growth	Gradual disinflation possibly due to future expectations regarding the impact of the Brexit vote	Supply chain issues due to Brexit. Decreased consumption due to the impact of Covid 19. These created a deep recession (short-lived due to government intervention)

• The target unemployment rate for many economies is between 2-5%. In December 2022 the unemployment rate in the USA was 3.7% and in Singapore it was 2.6%
  
  
• Low unemployment rates like this are close to the full employment level of labour (Y_FE)
  • There will always be a level of frictional, seasonal and structural unemployment
  • This makes it impossible to achieve 100% employment and is called the natural rate of unemployment (NRU)
    
    
• Different economies have different unemployment rates that are considered to be close to the full employment level of labour e.g. Japan's level is about 2.5% while India's is about 5.7%
  
  
• Within the broader unemployment rate, there is an increased emphasis on the unemployment rate within different sections of the population
  • E.g. youth unemployment, ethnic/racial unemployment by group
    • In 2021, black unemployment in the UK was 11% and white unemployment was 4.%

The unemployment rate in the UK from 1998 - 2020
Source: Macrotrends

 

• Unemployment tends to be inversely proportional to real GDP growth
  • When real GDP increases, unemployment falls
  • When real GDP decreases, unemployment rises
    
    

• Many economies have a target inflation rate of 2% using the Consumer Price Index (CPI)
  
  
• A low rate of inflation is desirable as it is a symptom of economic growth
  
  
• The different causes of inflation (cost push or demand pull) require different policy responses from the Government
  • Demand-side policies ease demand pull inflation
  • Supply-side policies ease cost push inflation
    
    

The inflation rate in the UK from 2012 to 2021 using the CPI

 

• In the UK, a continual deviation from the target of 2% would not be considered stable
  • An inflation rate in April 2022 of 4-5% was considered to be unstable, eroding household purchasing power
  • By October 2022 the inflation rate had risen to 11.1%
     
• A low and stable rate of inflation is important as it
  • Allows firms to confidently plan for future investment
  • Offers price stability to consumers