Welcome to Government Objectives: Setting the Economic Course!
Hi everyone! Think of the government as the captain steering a massive ship—the national economy. This chapter is all about where the captain wants to go and how they measure success on that journey. Why is this important? Because the government's goals determine the policies they use, and those policies affect your daily life!
Don't worry if some terms seem complicated at first. We will break them down into simple, manageable pieces. Let's get started!
The Core Economic Objectives: The "Magic Quad"
Governments usually try to achieve four main economic goals simultaneously. It’s tough because sometimes achieving one goal makes another goal harder! This balancing act is what makes economics so interesting.
Memory Trick: G.E.I.B.
You can remember the main goals using this simple phrase:
Great (Economic Growth)
Economies (Low Employment / Full Employment)
Include (Price Stability / Low Inflation)
Balance (Balance of Balance of Payments Stability)
1. Economic Growth
This is probably the most talked-about objective. Essentially, economic growth means that the country is producing more goods and services this year than it did last year.
What is Economic Growth?
Economic Growth is defined as the increase in the capacity of an economy to produce goods and services, compared from one period of time to another.
How do we measure it?
We measure growth using Gross Domestic Product (GDP).
- Gross Domestic Product (GDP): This is the total value of all final goods and services produced within a country's borders over a specific period (usually one year).
Analogy: The Economic Pie
Imagine the economy is a giant pie. If the economy grows, the pie gets bigger. If the pie is bigger, everyone (in theory) can have a larger slice of things like better healthcare, new phones, more schools, and improved roads.
Why is Economic Growth the Goal?
The government aims for sustainable growth (growth that can continue without causing major environmental or resource problems) because it leads to:
- Higher Standard of Living: People earn more and can buy better goods and services.
- Lower Unemployment: To produce more, firms need to hire more workers.
- Increased Government Revenue: More people working and spending means the government collects more tax money, which it can use on public services (like hospitals and police).
Goal: Increase in national output (GDP).
Why: Improves living standards and creates jobs.
2. Full Employment (Low Unemployment)
A country is using its resources efficiently when everyone who wants a job can find one. This is the objective of full employment.
What is Unemployment?
Unemployment occurs when people who are willing and able to work cannot find a job.
Important Note: Full employment does not mean 0% unemployment. There will always be a small percentage of people unemployed, perhaps because they are taking time to switch jobs (known as frictional unemployment). Economists consider a low rate (e.g., 3% to 5%) to be ‘full employment’.
Why is Low Unemployment Important?
High unemployment is terrible for the economy and for individuals:
- Wasted Resources: Unemployed people are a resource (labour) that the country is not using. This reduces the country’s total potential output (GDP).
- Increased Government Spending: The government has to spend more money on unemployment benefits and support programs.
- Lower Tax Revenue: Unemployed people are not paying income tax.
- Social Costs: Long-term unemployment can lead to poverty, mental health issues, and crime.
Did you know?
The government often targets job creation in specific sectors (such as infrastructure or technology) to help reduce unemployment rapidly.
3. Price Stability (Low Inflation)
Imagine going to the shop and finding the price of your favourite chocolate bar has doubled since last week. That's inflation in action! Governments try to keep prices stable.
What is Inflation?
Inflation is defined as the sustained increase in the general price level in an economy over a period of time.
Price stability means keeping inflation low and predictable, often targeting a small positive rate (e.g., 2%).
Analogy: The Shrinking Wallet
If you have inflation, your money loses its value. £10 today might buy less next year. It's like your wallet is shrinking in purchasing power even though the number on the notes stays the same.
Why is High Inflation Bad?
When inflation gets out of control (known as hyperinflation), it causes chaos:
- Reduced Purchasing Power: As prices rise faster than wages, people become poorer.
- Uncertainty for Businesses: Firms are reluctant to invest in new projects if they don't know what their costs or revenues will be in the future.
- Hurts Savers: The real value of money held in savings accounts decreases rapidly.
- Discourages Investment: High inflation can make the country look risky to foreign investors.
Tip for Struggling Students: Just remember that Price Stability means prices aren't changing too quickly. The government wants prices to stay roughly the same so people can plan their spending and saving.
Goal: Keep inflation low (prices rising slowly and predictably).
Why: Protects savings and encourages business investment.
4. Balance of Payments (BOP) Stability
This is often the trickiest objective, but it's essential. The Balance of Payments tracks all the money flowing in and out of the country.
What is the Balance of Payments?
The Balance of Payments (BOP) is a record of all financial transactions made between one country and the rest of the world over a specific period.
Think of the BOP as the country’s bank statement.
It includes two main parts:
- The Current Account: Tracks goods and services (Exports and Imports).
- The Financial Account: Tracks investment flows (money coming in and out from buying assets like land or company shares).
The Objective: Equilibrium or Stability
Governments aim for BOP equilibrium (stability). This means the money flowing into the country (from exports, tourism, and foreign investment) roughly equals the money flowing out (from imports, spending abroad, etc.).
- Surplus: Money flowing in is greater than money flowing out. (Generally good, but can cause currency problems).
- Deficit: Money flowing out is greater than money flowing in. (This is usually the problem.)
Why is a Large Deficit Bad?
If a country runs a massive and continuous Balance of Payments deficit (more money leaving than entering), it means the country has to borrow heavily from other nations to fund its spending. This is unsustainable and can lead to:
- National Debt: Reliance on foreign lenders.
- Loss of Confidence: Foreign investors might stop investing if they think the country cannot pay its way.
- Pressure on Currency: The country’s currency may lose value, making imports more expensive.
Goal: Keep the flow of money in and out of the country roughly equal.
Why: To avoid relying on foreign borrowing and maintain confidence in the economy.
5. Conflicts Between Objectives
Don't worry if this seems tricky at first—this is where real-world economics gets complicated! Governments often find that when they try to achieve one objective, they accidentally make another objective harder to reach.
Conflict Example 1: Growth vs. Inflation
This is the most famous conflict.
- When the government tries to boost Economic Growth, they encourage people to spend more (maybe by lowering interest rates or cutting taxes).
- As spending (demand) increases rapidly, firms might struggle to keep up with production.
- This extra demand pushes prices up, leading to higher Inflation.
The solution? Governments must manage growth carefully to ensure it's not too fast, causing overheating and high inflation.
Conflict Example 2: Unemployment vs. Inflation
When the economy is booming and unemployment is very low:
- Firms struggle to find workers.
- Workers can demand higher wages.
- These higher wages increase the costs for businesses, which they pass on to consumers through higher prices (Inflation).
Essentially, low unemployment often means higher wage demands, which contributes to higher inflation.
Conflict Example 3: Growth vs. Balance of Payments
When a country achieves fast Economic Growth, people earn more money:
- They use this extra money to buy goods, including Imports (like foreign cars or electronics).
- Higher imports mean more money is flowing out of the country.
- This can worsen the Balance of Payments deficit.
Common Mistake to Avoid
Students often forget that objectives conflict. When asked about policy outcomes, always consider if the policy solving one problem (e.g., unemployment) might create another (e.g., inflation).
Chapter Summary and Final Thoughts
You’ve just navigated the four key economic goals that governments constantly strive to balance. These objectives form the foundation for all government economic policy decisions.
Remember the G.E.I.B. goals:
- Growth (High GDP)
- Employment (Low Unemployment)
- Inflation (Price Stability)
- Balance of Payments (Stability)
Understanding these objectives is the first step to understanding why governments make the economic choices they do!