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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 g
row
th r
ate
(%)
Con. Labour Conservative Labour
Economic growth in the UKEconomic growth in the UK
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
1970 1975 1980 1985 1990 1995 2000 2005
Ann
ual g
row
th r
ate
(%)
UK
EU12 Japan
USA
Growth rates in selected industrial countriesGrowth rates in selected industrial countries
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
1970 1975 1980 1985 1990 1995 2000 2005
-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
Output gaps in selected countries: 1980–2007Output gaps in selected countries: 1980–2007
Source: based on data in Economic Outlook (OECD, various years)
Macroeconomic PerformanceMacroeconomic Performance
Economic Growth and Fluctuations
Economic Growth and Fluctuations
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 2007Average annual growth rates 1997 to 2007
Source: based on data in OECD Economic Outlook (OECD)
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)
Source: Budget Report 2007, Box 3.1, (H.M. Treasury)
International comparisons ofOutput per Worker (2005)
International comparisons ofOutput per Worker (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
2001–08 17.0 18.1 23.7 20.2 18.5
Gross fixed capital formation as apercentage of GDP: 1960–2005
Gross fixed capital formation as apercentage of GDP: 1960–2005
Source: based on data in OECD Economic Outlook (OECD)
Macroeconomic PerformanceMacroeconomic Performance
Long-term Economic Growth
Long-term Economic Growth
Macroeconomic PerformanceMacroeconomic Performance
InflationInflation
Ann
ual g
row
th r
ate
(%)
Inflation rates in the UKInflation rates in the UK
-2
0
2
4
6
8
10
12
14
16
18
20
22
24
26
1965 1970 1975 1980 1985 1990 1995 2000 2005
Ann
ual g
row
th r
ate
(%)
UK
EU12 Japan
USA
Inflation rates in selected industrial countriesInflation rates in selected industrial countries
-2
0
2
4
6
8
10
12
14
16
18
20
22
24
26
1965 1970 1975 1980 1985 1990 1995 2000 2005
Average (CPI) inflation rates 1997 to 2007Average (CPI) inflation rates 1997 to 2007
Source: based on data in OECD Economic Outlook (OECD)
Macroeconomic PerformanceMacroeconomic Performance
InflationInflation
Macroeconomic PerformanceMacroeconomic Performance
UnemploymentUnemployment
Ann
ual g
row
th r
ate
(%)
UK unemployment ratesUK unemployment rates
0
2
4
6
8
10
12
14
1970 1975 1980 1985 1990 1995 2000 2005
0
2
4
6
8
10
12
14
1970 1975 1980 1985 1990 1995 2000 2005
Ann
ual g
row
th r
ate
(%)
UK
EU12 Japan
USA
Unemployment rates in selected industrial countriesUnemployment rates in selected industrial countries
Average LFS unemployment rates 1997 to 2007Average LFS unemployment rates 1997 to 2007
Source: based on data in OECD Economic Outlook (OECD)
Macroeconomic PerformanceMacroeconomic Performance
UnemploymentUnemployment
Macroeconomic PerformanceMacroeconomic Performance
Balance of PaymentsBalance of Payments
Source: Budget Report 2007, Chart B7 (H. M. Treasury)
Balance of payments on current accountBalance of payments on current account
Macroeconomic PerformanceMacroeconomic Performance
Balance of PaymentsBalance of Payments
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: 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.
Meeting the sustainable investment rule?Meeting the sustainable investment rule?
Source: Public-sector Finances Databank, Table A8 (H. M. Treasury)
0
5
10
15
20
25
30
35
40
45
50
Av 74-97 97/8 99/0 01/2 03/4 05/6 07/8 09/0
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
Ann
ual g
row
th r
ate
(%)
Inflation rates in the UKInflation rates in the UK
-2
0
2
4
6
8
10
12
14
16
18
20
22
24
26
1965 1970 1975 1980 1985 1990 1995 2000 2005
Current CPI inflation projection based on market interest rate expectations
Current CPI inflation projection based on market interest rate expectations
Source: Inflation Report May 2007, Chart 5.3 (Bank of England)
Inflation performance and expectationsInflation performance and expectations
Source: Budget Report 2007, Box 3.1 (H.M. Treasury)
0
2
4
6
8
10
12
14
16
18
20
22
24
26
0 1 2 3 4 5 6 7 8 9 10 11 12 13
75
74
8076
77
79
7173
7072
78
90
89
9796
9188
95
82
8384
85
86
93
8792
94
81Infla
tion
(%)
Unemployment (%)
6968
6763
6265
6664
60
61
99
98
0001 020304
05 06
Inflation and UnemploymentInflation and Unemployment
0
5
10
15
20
25
2 4 6 8 10 12
Unemployment (%)
Infla
tion
(%
incr
ea
se in
RP
IX)
1967-79
1979-93
1993-2006
1975
1967
19781972
1980
1984
1990
199319972006
The path of inflation and unemployment in the UK?The path of inflation and unemployment in the UK?
Macroeconomic PerformanceMacroeconomic Performance
Policy rulesPolicy rules
Macroeconomic PerformanceMacroeconomic Performance
Trade-offs?Trade-offs?
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3 4 5 6 7 8 9 10 11
Unemployment (%)
CP
I In
flatio
n (%
)
Source: based on data in OECD Economic Outlook (OECD)
USA
Canada
UK
Italy
France
Japan
Germany
Average Inflation and Unemploymentfor G7 Countries (1997–2007)
Average Inflation and Unemploymentfor G7 Countries (1997–2007)
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1.0 1.5 2.0 2.5 3.0 3.5 4.0
Economic growth (%)
CP
I In
flatio
n (%
)
Source: based on data in OECD Economic Outlook (OECD)
USA
Canada
UK
Italy
France
Japan
Germany
Average Inflation and Economic Growthfor G7 Countries (1997–2007)
Average Inflation and Economic Growthfor G7 Countries (1997–2007)
Macroeconomic PerformanceMacroeconomic Performance
Trade-offs?Trade-offs?
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?
– 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?
0
20
40
60
80
100
120
140
160
180
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Ho
use
hol
d d
eb
t as
% o
f dis
po
sab
le in
com
e (
%)
UK
Italy
JapanUSA
Household debt in G7 countriesHousehold debt in G7 countries
Canada
Germany
France
Source: based on data in OECD Economic Outlook (OECD)
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?
– 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
Bottom20%
Next 20%
Middle20%
Next 20%
Top20% 16%
22%
44%
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 2005/6
Source: ‘The effects of taxes and benefits on household income. 2005/06 (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?
– 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
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?
– 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
For access to free datasets see:http://www.economicsnetwork.ac.uk/links/data_free.htm
For access to free datasets see:http://www.economicsnetwork.ac.uk/links/data_free.htm
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