Macroeconomic Objectives

What Macroeconomic Objectives covers

Macroeconomic objectives is examined in Unit AS 2, Managing the National Economy. It covers why governments target inflation, unemployment, the external balance and growth, objectives beyond the main four: the environment and the distribution of income and wealth, picturing inequality: the Lorenz curve and the Gini coefficient, where the objectives collide: the main policy conflicts and judging the trade-offs: how sharp is a conflict?.

The 5 subtopics

Each one has its own page.

• Why governments target inflation, unemployment, the external balance and growthFull employment not the same thing as zero unemployment, link between the growth objective and the unemployment objective and government publish its macroeconomic objectives instead of pursuing them privately.Open →
• Objectives beyond the main four: the environment and the distribution of income and wealthGovernment adopt environmental objectives alongside targets for output and prices, increase in GDP not and income inequality concern a government when average income is rising.Open →
• Picturing inequality: the Lorenz curve and the Gini coefficientTwo very different distributions produce the same Gini coefficient.Open →
• Where the objectives collide: the main policy conflictsConflict between economic growth and environmental objectives, strong growth and a strengthening currency together squeeze manufacturing employment and argument that supply-side policy escapes the conflicts between macroeconomic objectives.Open →
• Judging the trade-offs: how sharp is a conflict?Time lags make policy conflicts harder to manage and policy conflicts be reduced but never entirely removed.Open →

What you need to know

Answer each one before you reveal it.

Take Macroeconomic Objectives further

The same content, four other ways.

Commonly confused

Pairs that lose marks when they are blurred together.

• Area A on a Lorenz diagram vs The Gini coefficient itself

  Area A on a Lorenz diagram: the area between the line of equality and the curve. The Gini coefficient itself: A divided by (A + B), where A + B is 0.5, giving a value from 0 to 1.

• Disinflation vs Deflation

  Disinflation: a positive but falling rate, such as a move from 8 per cent to 3 per cent, with the price level still rising. Deflation: a negative rate, with the price level falling.

Questions from this topic

Each one with the model answer underneath.

1. 1

   Why does a government commit to a published numerical inflation target rather than simply promising to keep inflation 'low'?

   Model answer

   A published number anchors expectations, because firms setting prices and workers bargaining over wages can plan around a figure they believe will hold. A vague promise gives them nothing to anchor to, so they fall back on recent experience, which makes inflation self-perpetuating. A number is also testable, so the body responsible can be held to account when it misses.

2. 2

   Which four objectives dominate UK macroeconomic policy, and what is each one measured by?

   Model answer

   Price stability, measured by the annual percentage change in a consumer price index. Low unemployment, measured by the share of the labour force without work but seeking it. A sustainable balance of payments, measured principally by the current account balance as a share of GDP. Economic growth, measured by the annual percentage change in real GDP.

3. 3

   Why is price stability treated as an objective in its own right rather than only as a means to faster growth?

   Model answer

   Inflation imposes costs even when output is unaffected: it erodes the real value of savings and fixed incomes, redistributes arbitrarily from lenders to borrowers, and forces firms to spend resources repricing. Because these costs fall on identifiable people regardless of what happens to output, controlling inflation is a goal in itself and not merely an input into growth.

4. 4

   If inflation is costly, why does the government aim for a small positive rate rather than zero?

   Model answer

   A small positive rate gives room to cut real wages without cutting anyone's cash pay, which helps labour markets adjust when demand falls. It also keeps the economy away from deflation, which is harder to escape because interest rates cannot fall far below zero. Finally, measured inflation slightly overstates true inflation because indices struggle to capture quality improvement, so a measured target above zero is closer to genuine price stability.

5. 5

   Why does the government treat unemployment as a problem when the unemployed continue to receive benefit payments?

   Model answer

   Benefits transfer income but do not replace the output the unemployed would have produced, so the economy is permanently poorer by that lost output. Benefits are also financed by taxation, so employment brings a double gain to the public finances through higher tax receipts and lower spending. Beyond the arithmetic, long spells out of work erode skills and damage health, which reduces a person's future earning power.

6. 6

   Why is full employment not the same thing as zero unemployment?

   Model answer

   In any functioning economy some people are between jobs at any moment, because matching workers to vacancies takes time and because people quit to search for something better. This frictional unemployment is a sign that the labour market is reallocating labour, not that it has failed. Full employment therefore means that everyone willing to work at the going wage can find work reasonably quickly, which is consistent with a positive measured rate.

What is inside Levo

Six ways to work the same material.

Macroeconomic Objectives revision questions

What does Macroeconomic Objectives cover in CCEA A-Level Economics?

5 subtopics: why governments target inflation, unemployment, the external balance and growth, objectives beyond the main four: the environment and the distribution of income and wealth, picturing inequality: the lorenz curve and the gini coefficient, where the objectives collide: the main policy conflicts and judging the trade-offs: how sharp is a conflict?. Each one has its own page with questions and model answers.

How is Macroeconomic Objectives organised?

By the CCEA 4410 specification, subtopic by subtopic, so it matches the order you are taught it in.