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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?. The UK Economy. Main macroeconomic objectives Long-term economic growth Stability Low inflation Low unemployment (Reduction in poverty and inequality) - PowerPoint PPT Presentation
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AS/A2 The national economyAS/A2 The national economy
The UK Economy:a Health Check
How well has the economy been performing, and what’s
round the corner?
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 Edexcel OCR
1 Working as an economist Industrial economics
2 Business economics and the distribution of income
a. Labour economics: or b. Development economics
Two from a. Economics of work
and leisure b. Transport economics c. Economics of
Development d. The UK economy
3 Government policy, the national and international economies
The UK in the global economy
Economics in a European context
The UK EconomyThe 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
• 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 PerformanceMacroeconomic Performance
Economic Growth and Fluctuations
Economic Growth and Fluctuations
Ann
ual e
cono
mic
gro
wth
rat
e (%
) UK
Growth rates in the UKGrowth rates in the UK
Source: based on data in OECD Economic Outlook (OECD)
Ann
ual e
cono
mic
gro
wth
rat
e (%
) UK
EU15 Japan
USA
Growth rates in selected industrial economiesGrowth rates in selected industrial economies
Source: based on data in OECD Economic Outlook (OECD)
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
1980 1985 1990 1995 2000 2005
Ou
tpu
t ga
p (
act
ua
l ou
tpu
t min
us
po
ten
tial o
utp
ut
as
a %
of p
ote
ntia
l ou
tpu
t)
Source: based on data in Economic Outlook (OECD, various years)
Output gaps in the UK: 1980–2007Output gaps in the UK: 1980–2007
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
1980 1985 1990 1995 2000 2005
Ou
tpu
t ga
p (
act
ua
l ou
tpu
t min
us
po
ten
tial o
utp
ut
as
a %
of p
ote
ntia
l ou
tpu
t)
UK Germany
USA Japan
Source: based on data in Economic Outlook (OECD, various years)
Output gaps in selected countries: 1980–2007Output gaps in selected countries: 1980–2007
Macroeconomic PerformanceMacroeconomic Performance
Long-term Economic Growth
Long-term Economic Growth
UK GDP at market prices (2001 = 100)UK GDP at market prices (2001 = 100)
Source: National Statistics time series data
Average annual growth rates 1997 to 2006Average annual growth rates 1997 to 2006
Y2O
Pri
ce le
vel
National output (real GDP)
AS
AD
P1
Aggregate demand and aggregate supplyAggregate demand and aggregate supply
AD2
AS2
P2
Y1
Y3O
Pri
ce le
vel
AS
AD
P1
Aggregate demand and aggregate supplyAggregate demand and aggregate supply
AD2
AS2
P2
National output (real GDP)Y1 Y2
The UK EconomyThe 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
• 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)Productivity in selected countries (UK = 100)
Source: Pre-Budget Report 2005 and 2006, Box 3.1, (H.M. Treasury)
Gross fixed capital formation as apercentage of GDP: 1960–2005
Gross fixed capital formation as apercentage of GDP: 1960–2005
Year (average) UK Germany Japan EU USA
1960–67
1968–73
1974–80
1981–85
1986–90
1991–94
1995–00
17.7
18.9
19.2
16.5
18.9
16.6
16.8
25.2
24.5
21.0
20.4
19.9
22.4
21.7
31.0
34.6
31.8
28.7
29.8
30.0
27.4
22.8
23.6
22.2
19.8
20.1
19.8
19.8
18.2
19.2
18.9
18.9
18.3
16.6
18.9
2001–05 16.7 18.5 24.2 19.5 18.4
Source: based on data in OECD Economic Outlook (OECD)
Macroeconomic PerformanceMacroeconomic Performance
InflationInflation
-2
0
2
4
6
8
10
12
14
16
18
20
22
24
26
1965 1970 1975 1980 1985 1990 1995 2000 2005
Infla
tion
(% in
crea
se in
con
sum
er p
rices
)UK inflationUK inflation
Source: based on data in OECD Economic Outlook (OECD)
-2
0
2
4
6
8
10
12
14
16
18
20
22
24
26
1965 1970 1975 1980 1985 1990 1995 2000 2005
Infla
tion
(% in
crea
se in
con
sum
er p
rices
)
UK
EU15 JapanUSA
Inflation rates in selected industrial countriesInflation rates in selected industrial countries
Source: based on data in OECD Economic Outlook (OECD)
Average (CPI) inflation rates 1997 to 2006Average (CPI) inflation rates 1997 to 2006
Source: based on data in OECD Economic Outlook (OECD)
Macroeconomic PerformanceMacroeconomic Performance
UnemploymentUnemployment
UK
UK unemployment ratesUK unemployment rates
Source: based on data in OECD Economic Outlook (OECD)
UK
EU15
USA
Japan
Unemployment rates in selected industrial economiesUnemployment rates in selected industrial economies
Source: based on data in OECD Economic Outlook (OECD)
Average LFS unemployment rates 1997 to 2006Average LFS unemployment rates 1997 to 2006
Source: based on data in OECD Economic Outlook (OECD)
Macroeconomic PerformanceMacroeconomic Performance
Balance of PaymentsBalance of Payments
Source: Pre-Budget Report 2006, The Economy - Supplementary Charts and Tables, Chart 14 (H. M. Treasury)
Balance of payments on current accountBalance of payments on current account
Macroeconomic PerformanceMacroeconomic Performance
Policy rulesPolicy rules
Policy rulesPolicy 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
• 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?Meeting the Golden Rule?
Source: Pre-Budget Report 2006, Chart 2.4 (H. M. Treasury)
Meeting the sustainable investment rule?Meeting the sustainable investment rule?
Source: Public-sector Finances Databank, Table A6 (H. M. Treasury)
0
5
10
15
20
25
30
35
40
45
50
Av 74-96 97/8 99/0 01/2 03/4 05/6 07/8
Per
cent
age
of G
DP
Public-Sector Net Debt as % of GDP
Policy rulesPolicy 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
• 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
• Monetary policy– Bank of England independence
– Inflation target: 2% CPI inflation (1%) in 24 months’ time
0
2
4
6
8
10
12
14
16
18
20
22
24
26
1965 1970 1975 1980 1985 1990 1995 2000 2005
Infla
tion
(% in
crea
se in
con
sum
er p
rices
)UK inflationUK inflation
Current CPI inflation projection based on market interest rate expectations
Current CPI inflation projection based on market interest rate expectations
Source: Inflation Report November 2006, Chart 5.3 (Bank of England)
IssuesIssues
But are we getting happier?
But are we getting happier?
IssuesIssues
• 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?
• 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?
20
30
40
50
60
70
80
90
100
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995
ISE
W:
max
imum
= 1
00Index of Sustainable Economic Welfare (ISEW)
1950–96 (max = 100)Index of Sustainable Economic Welfare (ISEW)
1950–96 (max = 100)
USA
NetherlandsUK
Source: New Economics Foundation/Friends of the Earth
IssuesIssues
• 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
• 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
Bottom20%
Next 20%
Middle20%
Next 20%
Top20% 16%
23%
43%
11%
7%
Size distribution of UK income after taxes and benefits by quintile group of households
Size distribution of UK income after taxes and benefits by quintile group of households
1996/7
Source: ‘The effects of taxes and benefits on household income. 2004/05 Economic Trends, May 2006, Table 26 (National Statistics)
Bottom20%
Next 20%
Middle20%
Next 20%
Top20% 16%
23%
43%
11%
7%
Bottom20%
Next 20%
Middle20%
Next 20%
Top20%
12%
16%
22%
43%
7%
Size distribution of UK income after taxes and benefits by quintile group of households
Size distribution of UK income after taxes and benefits by quintile group of households
1996/7 2004/5
Source: ‘The effects of taxes and benefits on household income. 2004/05 Economic Trends, May 2006, Table 26 (National Statistics)
IssuesIssues
• 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
• 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
