Sunday 17 January 2010

Chapter 5. revision.

Government economic policy objectives and indicators of national economic performance.


Definitions:
Economic growth: in the short run, an increase in real GDP, and in the long run an increase in productive capacity, that is the maximum output that the economy can produce.
Unemployment: a situation where people are out of work but are willing and able to work.
Labour force: the people who are employed and unemployed ,that is ,those who are economically active.
Economically inactive: people of working age who are neither employed nor unemployed.Elastic: responsive to a change in market conditions.
Inflation rate: the percentage increase in the price level over a period of time.
Objectives of government economic policy.
Governments have always had general policy objectives for the macroeconomy but in recent years many have set more specific targets.
Economic growth.
Governments want to achieve economic growth because of the benefits it brings, including increasing material living standarts.
Definitions:
Sustainable economic growth: economic growth that can continue over tome and does not endanger future generations’ ability to expand productive capacity.
Trend growth: the expected increase in potential output over time. It is a measure of how fast the economy can grow without generating inflation.
Employment and unemployment.
Another government policy objective is high employment and low unemployment. Some governments state that their objective is full employment.
Definition:
Full employment: a situation where those wanting and able to work can find employment at the going wage rate.
Inflation.
A third macroeconomic policy objective is low and stable inflation.
Balance of payments.
In the past,governments placed considerable emphasis on achieving a satisfactory balance of payments position, particularly with respect to trade in goods and services.
Definition:
Current account deficit: when more money is leaving the country than entering it, as result of sales of its exports, income and current transfers from abroad being less than imports and income current transfers going abroad.
Economic stability.
While a satisfactory balance of payments position has been somewhat downgraded as an objective, economic stability has become more significant as an objective.The benefits of economic growth.
Although there can be costs of economic growth, most governments believe thet the benefits of economic growth outweigh the costs. This is why economic growth is a key macroeconomic objective.
The sustainability of economic growth.
One of the crucial factors that has to be taken into account in deciding whether economic growth is beneficial or not is whether it is sustainable.
Determination of exchange rates.
An exchange rate is the price of one currency in terms of another currencies. the bank of England Monetary Policy Committee’s main indicator of the pound’s value is the Bank’s trade-weighted index.
A number of factors influence the demand for and supply of a currency and so its exchange rate.
1) Demand for pounds is likely to be high and supply is likely to be low if UK products are internationally competitive.
2) Changes in income abroad influence the exchange rate.
3) Rising incomes at home may put downward pressure on the value of the pound.
4) A rise in UK interest rates, relative to other countries’ interest rates, will be likely to increase demand for pounds.
5) Pounds are also bought and sold by those wishing to undertake foreign direct investment(FDI).
6) Speculation is now an important influence on the exchange rate.
Definitions:
International monetary fund(IMF): an international organization that helps co-ordinate the international monetary system.
World trade organization(WTO): an international organization that promotes free international trade and rules on international trade disputes.
Exchange rate: the price of one currency in terms of another currencies.
Monetary policy committee(MPC): a committee of the Bank of England with responsibility for setting the interest rate in order to meet the government’s inflation target.
The relationship between the exchange rate and the interest rate.
Changes in the exchange rate and interest rate are closely linked. If for instance, the UK’s exchange rate rises, exports prices expressed in terms of foreign currencies will rise.
The effect of a change in exchange rate on export and import prices.
A fall in the exchange rate, called a depreciation if caused by market forces, will reduce the price of exports in terms of foreign currencies.
Changes in the exchange rate and the macroeconomy.
A reduction in the exchange rate is likely to improve the current account position of the balance of payments. A fall in the price of exports will result in a rise in export revenue if demand is elastic. A rise in import prices will reduce the expenditure on imports, again if demand is elastic.The causes of unemployment.
Cyclical unemployment: unemployment arising from a lack of demand.
Structural unemployment: unemployment caused by the decline of certain industries and occupations due to changes in demand and supply.
Frictional unemployment: short term unemployment occurring when workers are in-between jobs.
The causes of inflation:
Cost push: increases in the price level caused by increases in the costs of production.
Demand pull: increases in the price level caused by increases in aggregate demand.

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