1. AS/A2 The national economy
The UK Economy: a Health Check
How well has the economy been performing, and what’s round the corner?

3. The UK Economy Main macroeconomic objectives Important indicators
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

4. Macroeconomic Performance
Economic Growth and Fluctuations

5. Economic growth in the UK
Labour
Conservative
Annual growth rate (%)

6. Growth rates in selected industrial countriesUK
USA
EU12
Japan
Annual growth rate (%)

7. Output gaps in the UK: 1980–2007
Source: based on data in Economic Outlook (OECD, various years)

8. Output gaps in selected countries: 1980–2007
Source: based on data in Economic Outlook (OECD, various years)

9. Macroeconomic Performance
Economic Growth and Fluctuations

10. Macroeconomic Performance
Long-term Economic Growth

11. UK GDP at market prices (2001 = 100)
Source: National Statistics time series data

12. Average annual growth rates 1997 to 2007
Source: based on data in OECD Economic Outlook (OECD)

13. Aggregate demand and aggregate supply
AD2
Aggregate demand and aggregate supply
AS2 AS
Price level P2 Y2 P1 AD O Y1
National output (real GDP)

14. Aggregate demand and aggregate supply
AD2
Aggregate demand and aggregate supply
AS2 AS
Price level P2 P1 Y3 AD O Y1 Y2
National output (real GDP)

15. 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

16. Productivity in selected countries (UK = 100)
Source: Pre-Budget Report 2005 and 2006, Box 3.1, (H.M. Treasury)

17. International comparisons of Output per Worker (2005)
Source: Budget Report 2007, Box 3.1, (H.M. Treasury)

18. Gross fixed capital formation as a
percentage of GDP: 1960–2005
Source: based on data in OECD Economic Outlook (OECD)

19. Macroeconomic Performance
Long-term Economic Growth

20. Macroeconomic Performance
Inflation

21. Inflation rates in the UK
Annual growth rate (%)

22. Inflation rates in selected industrial countriesUK
USA
EU12
Japan
Annual growth rate (%)

23. Average (CPI) inflation rates 1997 to 2007
Source: based on data in OECD Economic Outlook (OECD)

24. Macroeconomic Performance
Inflation

25. Macroeconomic Performance
Unemployment

26. UK unemployment rates
Annual growth rate (%)

27. Unemployment rates in selected industrial countriesUK
USA
EU12
Japan
Annual growth rate (%)

28. Average LFS unemployment rates 1997 to 2007
Source: based on data in OECD Economic Outlook (OECD)

29. Macroeconomic Performance
Unemployment

30. Macroeconomic Performance
Balance of Payments

31. Balance of payments on current account
Source: Budget Report 2007, Chart B7 (H. M. Treasury)

32. Macroeconomic Performance
Balance of Payments

33. Macroeconomic Performance
Policy rules

34. 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

35. Meeting the Golden Rule?
But:
Public spending increasing more rapidly than Budget Forecast.
Is public spending delivering value for money?
Curb on real public spending growth from 4.8% over past 6 years to 2.7% next year and 2% thereafter.
Source: Budget Report 2007, Chart 2.3 (H. M. Treasury)

36. Meeting the sustainable investment rule?
Public-Sector Net Debt as % of GDP
Percentage of GDP
Source: Public-sector Finances Databank, Table A8 (H. M. Treasury)

37. Policy rules Fiscal policy Monetary 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

38. Inflation rates in the UK
Annual growth rate (%)

39. Current CPI inflation projection based on market interest rate expectations
Source: Inflation Report May 2007, Chart 5.3 (Bank of England)

40. Inflation performance and expectations
Source: Budget Report 2007, Box 3.1 (H.M. Treasury)

41. Inflation and Unemployment75 80 76 74 77
Inflation (%) 79 81 90 71 73 82 78 89 72 70 91 85 69 84 65 88 68 83 62 87 66 97 95 92 86 61 64 67 98 06 94 05 96 63 01 02 93 00 99 60 04 03
Unemployment (%)

42. The path of inflation and unemployment in the UK?
1975
1980
1990
1978
1972
1984
2006
1997
1967
1993

43. Macroeconomic Performance
Policy rules

44. Macroeconomic Performance
Trade-offs?

45. Average Inflation and Unemployment for G7 Countries (1997–2007)
USA
Italy
Canada UK
France
Germany
Japan
Source: based on data in OECD Economic Outlook (OECD)

46. Average Inflation and Economic Growth for G7 Countries (1997–2007)
Japan
Germany
France UK
Canada
Italy
USA
Source: based on data in OECD Economic Outlook (OECD)

47. Macroeconomic Performance
Trade-offs?

48. But are we getting happier?
Issues
But are we getting happier?

49. 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?
What about household debt?

50. Household debt in G7 countriesUK
USA
Japan
Canada
Germany
Household debt as % of disposable income (%)
France
Italy
Source: based on data in OECD Economic Outlook (OECD)

51. Index of Sustainable Economic Welfare (ISEW) 1950–96 (max = 100)UK
Netherlands
USA
Source: New Economics Foundation/Friends of the Earth

52. Issues Is GDP a good measure? Poverty and inequality
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?
What about household debt?
Poverty and inequality

53. Size distribution of UK income after taxes and benefits by quintile group of households
Bottom
20%
Next 20%
Middle
Top
12%
16%
22%
43% 7%
Bottom
20%
Next 20% 7%
11%
Middle
20%
Top
20%
44%
16%
22%
Next 20%
1996/7
2005/6
Source: ‘The effects of taxes and benefits on household income. 2005/06 (National Statistics)

54. Issues Is GDP a good measure? Poverty and inequality Social cohesion
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?
What about household debt?
Poverty and inequality
Social cohesion

55. Issues Is GDP a good measure? Poverty and inequality Social cohesion
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?
What about household debt?
Poverty and inequality
Social cohesion
The environment

56. For access to free datasets see: