AS/A2 The national economy

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

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

4. Macroeconomic Performance Economic Growth and Fluctuations

5. Growth rates in the UK UK Annual economic growth rate (%) Source: based on data in OECD Economic Outlook (OECD)

6. Growth rates in selected industrial economies USA UK Japan EU15 Annual economic growth rate (%) Source: based on data in OECD Economic Outlook (OECD)

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 Long-term Economic Growth

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

11. Average annual growth rates 1997 to 2006

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

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

14. 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

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

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

17. Macroeconomic Performance Inflation

18. UK inflation Source: based on data in OECD Economic Outlook (OECD)

19. Inflation rates in selected industrial countries UK USA Japan EU15 Source: based on data in OECD Economic Outlook (OECD)

20. Average (CPI) inflation rates 1997 to 2006 Source: based on data in OECD Economic Outlook (OECD)

21. Macroeconomic Performance Unemployment

22. UK unemployment rates UK Source: based on data in OECD Economic Outlook (OECD)

23. Unemployment rates in selected industrial economies UK USA Japan EU15 Source: based on data in OECD Economic Outlook (OECD)

24. Average LFS unemployment rates 1997 to 2006 Source: based on data in OECD Economic Outlook (OECD)

25. Macroeconomic Performance Balance of Payments

26. Balance of payments on current account Source: Pre-Budget Report 2006, The Economy - Supplementary Charts and Tables, Chart 14 (H. M. Treasury)

27. Macroeconomic Performance Policy rules

28. 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

29. Meeting the Golden Rule? Source: Pre-Budget Report 2006, Chart 2.4 (H. M. Treasury)

30. Meeting the sustainable investment rule? Public-Sector Net Debt as % of GDP Percentage of GDP Source: Public-sector Finances Databank, Table A6 (H. M. Treasury)

31. 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 • Monetary policy • Bank of England independence • Inflation target: 2% CPI inflation (1%) in 24 months’ time

32. UK inflation

33. Current CPI inflation projection based on market interest rate expectations Source: Inflation Report November 2006, Chart 5.3 (Bank of England)

34. Issues But are we getting happier?

35. 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?

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

37. 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? • Poverty and inequality

38. Size distribution of UK income after taxes and benefits by quintile group of households Bottom 20% Next 20% 7% 11% Middle 20% Top 20% 43% 16% 23% Next 20% 1996/7 Source: ‘The effects of taxes and benefits on household income. 2004/05 Economic Trends, May 2006, Table 26(National Statistics)

39. Size distribution of UK income after taxes and benefits by quintile group of households Bottom 20% Top 20% 7% Next 20% 12% 43% 16% Middle 20% 22% Next 20% Bottom 20% Next 20% 7% 11% Middle 20% Top 20% 43% 16% 23% Next 20% 1996/7 2004/5 Source: ‘The effects of taxes and benefits on household income. 2004/05 Economic Trends, May 2006, Table 26(National Statistics)

40. 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? • Poverty and inequality • Social cohesion • The environment