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Performance Of The UK Economy And Government Policy Objectives

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Title: Performance Of The UK Economy And Government Policy Objectives


1
Performance Of The UK Economy And Government
Policy Objectives
2
Content
  • Indicators Of National Economic Performance
  • The objectives of government economic policy
  • Economic growth
  • Inflation
  • Employment / Unemployment
  • Balance of payments

3
Indicators Of National Economic Performance
  • Key Indicators
  • Economic growth
  • Inflation
  • Employment / Unemployment
  • Balance of payments
  • These allow you to compare the performance of
    over time and between countries and areas

4
The objectives of government economic policy
  • Economic objectives are what the government wants
    to achieve and include
  • Stable prices (low inflation)
  • Steady and sustained economic growth
  • Low unemployment or full employment
  • A balanced balance of payments

5
Factors that influence governments ability to
achieve objectives
  • Availability of factors of production
  • Productivity of factors of production
  • Technology
  • Amount of trade between UK and other countries
  • Macroeconomic policy
  • Laws and legal system
  • Geography

6
Conflicts between objectives
  • Healthy Growth and low inflation when economies
    grow too quickly demand exceeds supply leading to
    a rise in prices
  • To keep inflation low the government uses tools
    like high interest rates which can deter economic
    growth
  • There is a trend rate of growth in the economy of
    2 ½ - 3 which is believed not to spark
    inflation

7
Healthy Growth and Balance of Payments Equilibrium
  • When the economy grows quickly consumption is
    high and British consumers have a tendency to
    spend their money on imports
  • This leads to a larger balance of payments
    deficit

8
Low unemployment and low inflation
  • Phillips curve shows an inverse relationship
    between unemployment and inflation
  • When the government decreases interest rates or
    increases public expenditure to decrease
    unemployment this will push wages higher
    therefore increasing prices and causing inflation
  • However measures to control inflation e.g. high
    interest rates and decreases public spending
    increase unemployment rates

9
Other conflicts
  • Healthy growth and the environment the more
    rapid the rate of growth the greater the level of
    production and the increase in levels of
    pollution etc
  • Healthy growth and equality when an economy
    grows it is often the rich that benefit and the
    poor that suffer creating more inequality in the
    country

10
Economic Growth
  • Economic growth is where the productive capacity
    of the economy is increasing
  • The principal indicator of economic growth is the
    rate of change for real national income
  • Real national income takes into account the
    impact of inflation on the growth rate

11
Economic Growth And PPF
  • Economic growth has caused a shift in the
    original PPF from PPF1 to PPF2
  • This shift means more of all goods are now able
    to be produced in the economy

12
Rate of Economic Growth
  • Rate of economic growth is influenced by
  • Labour supply
  • Productivity of labour
  • Productivity of capital
  • Investment in capital
  • Technology
  • Resource availability
  • The key to improving the rate of economic growth
    is to improve the factor productivity of factors
    of production

13
Supply side policies and economic growth
  • Supply side policies can be used to attempt to
    influence the underlying long term trend of
    economic growth
  • Be moving the LRAS curve outwards these policies
    aim to increase the level of economic growth in
    the country

14
Inflation
  • Inflation- A persistent increase in the level of
    consumer prices or a persistent decline in the
    purchasing power of money caused by an increase
    in available currency and credit beyond the
    proportion of available goods and services.
  • Over the long term, inflation erodes the
    purchasing power of your income and wealth. That
    means that even as you save and invest, your
    accumulated wealth buys less and less.

15
How to measure inflation
  • Every month the Government surveys prices and
    generates the current consumer price index (CPI)
  • This allows you to compare current figures with
    past figures

16
The causes of inflation
  • Inflation results when the macro economy has too
    much demand for available production.
  • Demand-Pull Inflation This inflation occurs when
    the government / consumers / business try to
    purchase more output than the economy is capable
    of producing.
  • Cost-Push Inflation Cost-push inflation is
    inflation due to decreases in supply, primarily
    due to increases in production cost

17
Inflation and Governmental Policy
  • Governments try and control inflation using the
    following tools
  • An increase in interest rates
  • Legislation reducing trade union power
  • Reduced expectations of inflation allowing
    businesses more confidence when setting prices
  • The bank of England tries to control the rate of
    inflation by using interest rates to try and
    prevent aggregate demand increasing more rapidly
    than the underlying trend in growth

18
Deflation
  • Deflation occurs when there is a fall in the
    general level of prices
  • Deflation can happen in the whole economy or in
    specific sectors of the economy
  • Deflation may be due to an increase in technology
    which has meant costs have decreased and these
    have been passed on to the consumer
  • In January 2007 there was deflation in the UK
    grocery market as the price of many foods
    decreased

19
Unemployment
  • There are a number of types of unemployment
  • Structural unemployment
  • Cyclical unemployment
  • Frictional unemployment
  • Structural unemployment occurs when the economy
    changes and industries die out
  • Training is needed to give the unemployed workers
    new skills

20
Unemployment
  • Cyclical unemployment is caused by the business
    cycle
  • Frictional unemployment is caused when people are
    temporarily out of work as they are moving jobs

21
Unemployment and Businesses
  • Increasing levels of unemployment can cause
    problems for firms
  • Cyclical unemployment can lead to a decrease in
    sales meaning businesses need to look for new
    markets
  • Structural unemployment can affect businesses in
    the local area

22
Unemployment and PPF
  • Unemployment means that scarce economic resources
    are being wasted reducing the long run potential
    of the economy
  • Where there are high levels of unemployment an
    economy will be operating inside the perimeters
    of its PPF

23
Unemployment and AD / AS
  • As Aggregate demand increases unemployment will
    decrease
  • Supply side policies can be used to increase
    aggregate supply in the economy and thereby
    reduce the level of unemployment
  • However if the growth in the level of aggregate
    demand is less than the underlying trend growth
    in output unemployment is likely to occur

24
Output Gap And Unemployment
  • The output gap measures the difference between
    potential and actual GDP
  • If the output gap is high there will be high
    unemployment and low inflation
  • If the output gap is small there is likely to be
    low unemployment but high inflation as the
    economy is nearing its productive capacity

25
Balance Of Payments On The Current Account
  • The balance of payments account records
    transactions between the UK and other countries
  • The current account is made up of
  • Trade in goods
  • Trade in services
  • Investment incomes
  • Transfers

26
Balance of Payments Account
  • A surplus means that the total value of exports
    (goods / services produced in the UK sold abroad)
    exceeds the amount of imports (goods / services
    produced overseas and sold in the UK)
  • A deficit means the total value of exports is
    less than the total value of imports

27
Summary
  • Indicators Of National Economic Performance are
    used to compare countries
  • The key objectives of government economic policy
    are to have sustainable economic growth, low
    inflation, low unemployment and a balanced
    balance of payments
  • Economic growth refers to an enlargement of
    productive capacity in an economy
  • Inflation is a rise in the general level of
    prices
  • Employment / Unemployment measures the amount of
    people out of work
  • Balance of payments looks at the value of all
    imports and exports into an economy
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