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

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Presentation on theme: "AS/A2 The national economy The UK Economy: a Health Check How well has the economy been performing, and whats round the corner? The UK Economy: a Health."— Presentation transcript:

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

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3 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 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

4 Macroeconomic Performance Economic Growth and Fluctuations

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

6 Annual growth rate (%) UK EU12 Japan USA Growth rates in selected industrial countries

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

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 Y2Y2 O Price level National output (real GDP) AS AD P1P1 Aggregate demand and aggregate supply AD 2 AS 2 P2P2 Y1Y1

14 Y3Y3 O Price level AS AD P1P1 Aggregate demand and aggregate supply AD 2 AS 2 P2P2 National output (real GDP) Y1Y1 Y2Y2

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

18 Gross fixed capital formation as a percentage of GDP: 1960–2005 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 Annual growth rate (%) Inflation rates in the UK

22 Annual growth rate (%) UK EU12 Japan USA Inflation rates in selected industrial countries

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 Annual growth rate (%) UK unemployment rates

27 Annual growth rate (%) UK EU12 Japan USA Unemployment rates in selected industrial countries

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

32 Macroeconomic Performance Balance of Payments

33 Macroeconomic Performance Policy rules

34 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

35 Meeting the Golden Rule? Source: Budget Report 2007, Chart 2.3 (H. M. Treasury) 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. 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.

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

37 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 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

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

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 (%) Unemployment (%) Inflation and Unemployment

42 The path of inflation and unemployment in the UK?

43 Macroeconomic Performance Policy rules

44 Macroeconomic Performance Trade-offs?

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

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

47 Macroeconomic Performance Trade-offs?

48 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? 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 as % of disposable income (%) UK Italy Japan USA Household debt in G7 countries Canada Germany France Source: based on data in OECD Economic Outlook (OECD)

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

52 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? 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? –What about household debt? Poverty and inequality

53 Bottom 20% Next 20% Middle 20% Next 20% Top 20% 16% 22% 44% 11% 7% Bottom 20% Next 20% Middle 20% Next 20% Top 20% 12% 16% 22% 43% 7% Size distribution of UK income after taxes and benefits by quintile group of households 1996/72005/6 Source: The effects of taxes and benefits on household income. 2005/06 (National Statistics)

54 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? Poverty and inequality Social cohesion 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? Poverty and inequality Social cohesion

55 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? 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? –What about household debt? Poverty and inequality Social cohesion The environment

56 For access to free datasets see: For access to free datasets see:


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