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Government and the Economy
Low
Inflation
Acceptable
Balance of
Payments
Deficit
Aims of
Government
Stable
Economic
Growth
Low
Unemployment
(1) Stable Economic Growth
Economic Growth
“More goods and services are produced this year, than
last.” (Increased Gross Domestic Product)
Features
• Increases Living Standards of population
• Falling Unemployment
• Increased Tax revenues, to spend on things
like schools, roads and hospitals.
The Economic Cycle
The Economic Cycle
The Economic Cycle
• Growth
GDP is raising, unemployment falling, people’s living
standards are generally increasing, most businesses do well
at this time.
• Boom
Caused by rapid growth and too much spending, prices
increase, due to a shortage of factors of production.
• Recession
A period of falling profits, reduced spending and profits.
GDP actually falls. People and firm are not confident about
the future.
• Slump
A serious and drawn out recession. Unemployment at high
levels and prices fall. Many businesses may close.
A: The number of new
housing starts begins to fall
D: Rising homelessness
E: Rising demand for
steel
B: There are more
unfilled job vacancies
C: Increasing
hours of
overtime
F: Long-term
unemployment
reaches new high
J: Rising business
class air revenues
G: Car plants decide to
reduce the number of
shifts
I: Home delivered pizza
becomes more popular
H: Consumers hit by
delays in product
delivery
K: Share prices hit by
rise in number of
company profit
warnings
L: Rising
lipstick
sales
M: Rising real income
N. Government announces a
fall in trade deficit due to
decline in imports
R: Imports of sewing
machines rise
P: Brick manufacturers report a rise
in unsold stocks
O: Supply of rented
property exceeds demand
Q: McDonald’s holds prices despite
rise in costs
U: More building skips
start appearing on the
streets
S: Banks relax
credit rules
X: Oil refineries report
a reduction in crude oil
stocks
V: Sales of milk
chocolate start to
decline
T: The cost of
shipping goods
around the world
starts to rise
Y: More companies
attempt to introduce
wage freezes
Z: Rising
government
spending
W: Shops delivering
lunchtime sandwiches
to offices raise their
prices because of
strong demand
(2) Low Unemployment
“Unemployment exists when people who are willing and
able to work, but cannot find work.”
Features
• The Unemployed do not produce goods and
services, so do not contribute to GDP.
• “Job Seekers Allowance,” is paid to those
unemployed. This has a Opportunity Cost of higher
taxes or reduced spending in other areas.
• Can also lead to crime and other social problems.
• For more details click here and here.
(3) Low Inflation
“Inflation is a general rise in Prices.”
Problems of Rapid Inflation:
• Spending power is reduced, as real incomes
fall.
• The Price of UK goods increases, which can
reduce sales (home and exports)
• High inflation is normally a problem in a
Boom.
• Current UK Inflation rate – here
(4) Acceptable Balance of Payments
“The Balance of Payments records the
differences between a countries exports and
imports.”
EXPORTS
IMPORTS
UK good
sold in
other
countries
Goods made
in other
countries,
sold in the UK.
Low
Inflation
Acceptable
Balance of
Payments
Deficit
Aims of
Government
Stable
Economic
Growth
Low
Unemployment
Government Economic Policies
Low
Inflation
Acceptable
Balance of
Payments
Deficit
Aims of
Government
Stable
Economic
Growth
Low
Unemployment
Fiscal
Policies
Monetary
Policies
Supply
Side
Policies
Fiscal Policy
Tax
Government
Spending
(A) Fiscal Policy
(1) Expansionist Policies
• Use in Recession / Slump
• Increase Spending, Cut Taxes
(2) Contractionary Policies
• Use in Boom / Recovery
• Reduce Spending / Increase Spending
Disposable Income:
The income you have after paying direct taxes.
(B) Monetary Policy
Uses interest rate to control borrowing and spending.
Interest Rates
“The cost of borrowing or the reward for saving.”
Boom / Recovery
• Increase interest rate
• Reduces disposable
income
• Stops economy
“Overheating”
Recession / Slump
• Reduce interest rate
• Increases disposable
income
• Encourage spending
(C) Supply Side Policies
“Used by government to improve efficient
supply of goods and services.”
Examples
• Privatisation
• Improve education and training
• Increase competition – reduce “Red
tape”