📈 Economic growth
You met this in Shifts of the PPC and Economic Growth: an increase in the output of the economy. Governments want it because more output can mean more jobs, higher incomes and better living standards.
Macroeconomic Aims » The Government's Macroeconomic Aims
What you'll learn this session
Study time: 30 minutes
Cambridge spec: 4.1.1
- The six macroeconomic aims of a government
- What each aim means in plain words
- Why governments choose each aim
- The criteria and targets a government may set to judge success
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Unlock This CourseWhat are macroeconomic aims?
So far you have looked at single markets, firms and workers. Now we zoom out and look at the whole economy of a country. Think of a government as the captain of a ship. The captain needs somewhere to steer. In the same way, a government needs clear goals for the economy as a whole.
These goals are called macroeconomic aims. Governments commonly choose these six.
Key terms:
- Macroeconomic aim: a goal a government sets for the whole economy of its country.
- Full employment: a situation where everyone who is willing and able to work can find a job. In practice, governments aim for low unemployment.
- Stable prices: prices that rise only slowly and predictably, so that inflation (a sustained rise in the general level of prices) stays low.
- Balance of payments stability: avoiding large and lasting gaps between the money a country receives from the rest of the world and the money it pays out.
- Redistribution of income: moving income from richer people to poorer people, so the gap between them gets smaller.
- Environmental sustainability: using resources and producing goods in a way that does not damage the environment, so that future generations can meet their own needs.
- Criteria (targets): the measurable standards a government sets to judge whether an aim has been met.
The six aims and why governments choose them
👷 Full employment
Everyone who wants to work can find a job. Governments want it because unemployed people lose income, and the country loses the goods and services they could have made.
🏷 Stable prices
Low inflation. Governments want it because families and firms can plan ahead when prices are predictable, and savings keep their buying power.
🌎 Balance of payments stability
No big, lasting gap between money coming in and going out of the country. Governments want it because a country cannot go on paying out far more than it earns from abroad.
🤝 Redistribution of income
A fairer sharing of income. Governments want it because very large gaps between rich and poor can leave some households unable to afford basic needs.
🌱 Environmental sustainability
Looking after the environment for the future. Governments want it because pollution and the using up of resources harm health and leave less for future generations.
The details of growth, unemployment, inflation and the balance of payments each get their own lessons later in the course. Here we only need to know what each aim is and why it is chosen.
Criteria: how does a government know it has succeeded?
An aim such as "low inflation" is vague. How low is low? So governments turn each aim into a criterion or target that can be measured. Then everyone can see whether the government is succeeding.
| Aim | Example of a criterion a government may set |
|---|---|
| Economic growth | Real GDP (the total output of the economy, adjusted for price changes) rises by about 3% a year |
| Full employment | Unemployment falls to 4% of the workforce or lower |
| Stable prices | Inflation stays at about 2% a year |
| Balance of payments stability | No large deficit or surplus in the country's payments with the rest of the world |
| Redistribution of income | The share of income going to the poorest households rises |
| Environmental sustainability | Carbon dioxide emissions fall by a set amount by a set year |
These figures are examples only. Each government chooses its own targets. A rule of thumb you can learn: many central banks aim for inflation of about 2% a year. It is not zero, because a little inflation is normal in a growing economy.
Worked example
The government of the made-up country of Pelmora wants more jobs. At the start of the year, 9 out of every 100 workers are unemployed. The government sets a target of 5 out of every 100. By the end of the year the figure is 6 out of every 100. The aim is full employment, the criterion is an unemployment rate of 5%, and the result is that the target has not been met, although the figure has moved closer to it.
Common mistakes
Writing that "full employment" means zero unemployment. Some people are always between jobs, so it means everyone who wants to work can find a job. Another slip is saying that stable prices means prices never change. It means prices rise slowly and predictably. Finally, do not mix up an aim (the goal) with a criterion (the measurable target for that goal).
Exam-style question
The government of Belvania has announced three aims for the next five years: an inflation rate of about 2% a year, an unemployment rate below 5%, and a fall in pollution from factories.
(a) Define full employment. [2 marks]
(b) Explain why the government of Belvania might want to keep inflation low. [3 marks]
(c) Identify the macroeconomic aim that is linked to reducing pollution from factories and explain one criterion the government could use to judge whether it has been met. [3 marks]
Model answer
(a) Full employment is a situation where everyone who is willing (1) and able to work can find a job (1).
(b) Low inflation means prices rise slowly and predictably (1). This helps firms and households plan ahead because they know roughly what things will cost (1). It also means that savings keep their buying power, so people are not made poorer as prices rise (1).
(c) The aim is environmental sustainability (1). A criterion could be that the amount of pollution released by factories falls by a set percentage by a set year (1). This is measurable, so the government can check the figures and see whether the target has been met (1).
Exam tip
When a question asks why a government chooses an aim, give the benefit of reaching it (for example, plans can be made with confidence) and the harm of not reaching it, rather than just repeating the name of the aim.