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AS/A2 The national economy
The UK Economy:
a Health Check
How well has the economy been
performing, and what’s
round the corner?
AS
AQA
Edexcel
OCR
1 Markets and market failure
Markets – how they work
The market system
2 The national economy
Markets – why they fail
Market failure and
government intervention
3 Markets at work
Managing the economy
The national and
international economy
A2
AQA
1 Working as an economist
2
Business economics and
the distribution of income
Government policy, the
3 national and international
economies
Edexcel
OCR
Two from
a. Economics of work
and leisure
b. Transport economics
a. Labour economics: or
c. Economics of
Development
b. Development economics
d. The UK economy
Industrial economics
The UK in the global
economy
Economics in a European
context
The UK Economy
• Main macroeconomic objectives
–
–
–
–
–
Long-term economic growth
Stability
Low inflation
Low unemployment
(Reduction in poverty and inequality)
• Important indicators
–
–
–
–
–
Productivity
Interest rates
Exchange rates
Balance of trade
Public borrowing
Macroeconomic Performance
Economic Growth
and Fluctuations
Growth rates in the UK
Annual economic growth rate (%)
10
UK
9
8
7
6
5
4
3
2
1
0
-1
-2
-3
1970
1975
1980
Source: based on data in OECD Economic Outlook (OECD)
1985
1990
1995
2000
2005
Growth rates in selected industrial economies
Annual economic growth rate (%)
10
UK
EU15
9
8
USA
Japan
7
6
5
4
3
2
1
0
-1
-2
-3
1970
1975
1980
Source: based on data in OECD Economic Outlook (OECD)
1985
1990
1995
2000
2005
Output gaps in the UK: 1980–2007
Output gap (actual output minus potential output
as a % of potential output)
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
1980
1985
1990
Source: based on data in Economic Outlook (OECD, various years)
1995
2000
2005
Output gaps in selected countries: 1980–2007
Output gap (actual output minus potential output
as a % of potential output)
6
UK
USA
5
Germany
Japan
4
3
2
1
0
-1
-2
-3
-4
-5
-6
1980
1985
1990
Source: based on data in Economic Outlook (OECD, various years)
1995
2000
2005
Macroeconomic Performance
Long-term
Economic Growth
UK GDP at market prices (2001 = 100)
120
110
Real GDP (2001 = 100)
100
90
80
70
60
50
40
30
20
1950
1955
1960
1965
Source: National Statistics time series data
1970
1975
1980
1985
1990
1995
2000
2005
Average annual growth rates 1997 to 2006
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
UK
USA
France Germany Japan
Italy
Canada
Aggregate demand and aggregate supply
Price level
AS
AS2
P2
P1
AD2
AD
O
Y1
Y2
National output (real GDP)
Aggregate demand and aggregate supply
Price level
AS
AS2
P2
P1
AD2
AD
O
Y1
Y2
Y3
National output (real GDP)
The UK Economy
• How to increase aggregate supply?
– More resources
• Investment
• Natural resources (e.g. oil)
• Labour
(e.g. from migration or higher retirement age)
• Greater use of resources
(e.g. longer working week)
– Greater productivity of resources
• Investment in R&D
• Greater incentives for efficiency
Productivity in selected countries (UK = 100)
150
Output per worker (2005)
Output per hour (2004)
140
Output per person of working age (2004)
130
120
110
100
90
80
70
60
UK
Germany
France
Source: Pre-Budget Report 2005 and 2006, Box 3.1, (H.M. Treasury)
USA
Gross fixed capital formation as a
percentage of GDP: 1960–2005
Year (average)
UK
Germany
Japan
EU
USA
1960–67
17.7
25.2
31.0
22.8
18.2
1968–73
18.9
24.5
34.6
23.6
19.2
1974–80
19.2
21.0
31.8
22.2
18.9
1981–85
16.5
20.4
28.7
19.8
18.9
1986–90
18.9
19.9
29.8
20.1
18.3
1991–94
16.6
22.4
30.0
19.8
16.6
1995–00
16.8
21.7
27.4
19.8
18.9
2001–05
16.7
18.5
24.2
19.5
18.4
Source: based on data in OECD Economic Outlook (OECD)
Macroeconomic Performance
Inflation
UK inflation
Inflation (% increase in consumer prices)
26
24
22
20
18
16
14
12
10
8
6
4
2
0
-2
1965
1970
1975
Source: based on data in OECD Economic Outlook (OECD)
1980
1985
1990
1995
2000
2005
Inflation rates in selected industrial countries
Inflation (% increase in consumer prices)
26
24
22
UK
EU15
20
USA
Japan
18
16
14
12
10
8
6
4
2
0
-2
1965
1970
1975
Source: based on data in OECD Economic Outlook (OECD)
1980
1985
1990
1995
2000
2005
Average (CPI) inflation rates 1997 to 2006
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
UK
USA
France Germany Japan
Source: based on data in OECD Economic Outlook (OECD)
Italy
Canada
Macroeconomic Performance
Unemployment
UK unemployment rates
UK
Unemployment (% of workforce)
14
12
10
8
6
4
2
0
1970
1975
1980
Source: based on data in OECD Economic Outlook (OECD)
1985
1990
1995
2000
2005
Unemployment rates in selected industrial economies
UK
EU15
Unemployment (% of workforce)
14
USA
Japan
12
10
8
6
4
2
0
1970
1975
1980
Source: based on data in OECD Economic Outlook (OECD)
1985
1990
1995
2000
2005
Average LFS unemployment rates 1997 to 2006
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
UK
USA
France Germany Japan
Source: based on data in OECD Economic Outlook (OECD)
Italy
Canada
Macroeconomic Performance
Balance of Payments
Balance of payments on current account
Source: Pre-Budget Report 2006, The Economy - Supplementary Charts and Tables, Chart 14 (H. M. Treasury)
Macroeconomic Performance
Policy rules
Policy rules
• Fiscal policy
– the Golden Rule
• over the economic cycle, the Government will borrow
only to invest and not to fund current spending
– the sustainable investment rule:
• net debt kept below 40 per cent of GDP over the
economic cycle
Meeting the Golden Rule?
Source: Pre-Budget Report 2006, Chart 2.4 (H. M. Treasury)
Meeting the sustainable investment rule?
50
Public-Sector Net Debt as % of GDP
45
Percentage of GDP
40
35
30
25
20
15
10
5
0
Av 74-96
97/8
99/0
01/2
Source: Public-sector Finances Databank, Table A6 (H. M. Treasury)
03/4
05/6
07/8
Policy rules
• Fiscal policy
– the Golden Rule
• over the economic cycle, the Government will borrow
only to invest and not to fund current spending
– the Sustainable Investment Rule:
• net debt kept below 40 per cent of GDP over the
economic cycle
• Monetary policy
– Bank of England independence
– Inflation target: 2% CPI inflation (1%) in 24
months’ time
UK inflation
Inflation (% increase in consumer prices)
26
24
22
20
18
16
14
12
10
8
6
4
2
0
1965
1970
1975
1980
1985
1990
1995
2000
2005
Current CPI inflation projection based on market
interest rate expectations
Source: Inflation Report November 2006, Chart 5.3 (Bank of England)
Issues
But are we getting
happier?
Issues
• Is GDP a good measure?
– Does material gain = happiness?
– What about ‘bads’?
e.g. commuting costs
– What about ‘defensive expenditure’
e.g. security
– What about hours worked and stress at work?
Index of Sustainable Economic Welfare (ISEW)
1950–96 (max = 100)
100
ISEW: maximum = 100
90
80
UK
Netherlands
70
60
USA
50
40
30
20
1950
1955
1960
1965
Source: New Economics Foundation/Friends of the Earth
1970
1975
1980
1985
1990
1995
Issues
• Is GDP a good measure?
– Does material gain = happiness?
– What about ‘bads’?
e.g. commuting costs
– What about ‘defensive expenditure’
e.g. security
– What about hours worked and stress at work?
• Poverty and inequality
Size distribution of UK income after taxes and benefits
by quintile group of households
Bottom
20%
Next 20%
7%
11%
Top
20%
Middle
20%
43%
16%
23%
Next 20%
1996/7
Source: ‘The effects of taxes and benefits on household income. 2004/05 Economic Trends, May 2006, Table 26 (National Statistics)
Size distribution of UK income after taxes and benefits
by quintile group of households
Bottom
20%
Bottom
20%
Next 20%
7%
11%
Top
20%
Top
20%
7%
Next 20%
12%
Middle
20%
43%
43%
16%
16%
Middle
20%
22%
23%
Next 20%
Next 20%
1996/7
2004/5
Source: ‘The effects of taxes and benefits on household income. 2004/05 Economic Trends, May 2006, Table 26 (National Statistics)
Issues
• Is GDP a good measure?
– Does material gain = happiness?
– What about ‘bads’?
e.g. commuting costs
– What about ‘defensive expenditure’
e.g. security
– What about hours worked and stress at work?
• Poverty and inequality
• Social cohesion
• The environment