Explain the government's main economic objectives, the meaning of economic growth and gross domestic product, the business cycle, and the main economic indicators used to judge performance.

What this dot point is asking

The national economy section opens by asking what the government is trying to achieve and how success is measured. CCEA expects you to know the main macroeconomic objectives, what economic growth and gross domestic product (GDP) mean, the business cycle of booms and recessions, and the main economic indicators used to judge performance. This is the foundation of Section 4, Managing the national economy, and everything about fiscal and monetary policy is an attempt to hit these objectives.

The main economic objectives

A government manages the economy to achieve four broad aims, and CCEA expects you to know all four.

• Economic growth. The government wants the economy to produce more goods and services over time, raising living standards.
• Low unemployment. It wants as many people who want work as possible to have it, so resources are used and incomes earned.
• Low and stable inflation. It wants prices to rise only slowly and predictably, to protect the value of money and people's savings.
• A satisfactory balance of payments. It wants the value of what the country sells abroad to be broadly in line with what it buys, so the country can pay its way.

These objectives can conflict: pushing for fast growth and very low unemployment can drive prices up, so the government often has to balance them.

Economic growth and GDP

Gross domestic product (GDP) is the total value of all the goods and services a country produces in a year. It is the headline measure of the size of an economy. Economic growth is an increase in real GDP over time: "real" means after stripping out inflation, so it measures a genuine rise in output, not just higher prices.

Growth is desirable because it raises living standards (more goods and services per person), tends to create jobs, and raises incomes and tax revenue that can fund public services. It can also bring costs, such as pollution, congestion and the using-up of resources, which is why some economists stress the quality of growth as well as its rate.

The business cycle

The economy does not grow at a steady rate; it moves through ups and downs called the business cycle (or economic cycle). There are four phases:

• Boom: output and incomes are high and rising fast, unemployment is low, but inflation tends to rise.
• Downturn (slowdown): growth slows, spending falls, and unemployment begins to rise.
• Recession: output actually falls, often defined as two consecutive quarters of falling real GDP; unemployment is high and confidence is low.
• Recovery (upturn): output starts rising again, spending and confidence return, and unemployment falls.

Governments use policy to try to smooth this cycle: to cool an overheating boom and to lift the economy out of a recession.

Economic indicators

To judge whether objectives are being met, economists track economic indicators. The main ones are the GDP growth rate (for growth), the unemployment rate (for jobs), the inflation rate, usually the Consumer Prices Index (for price stability), and the balance of payments (for trade). Other useful indicators include interest rates and the exchange rate. Comparing these figures over time and against other countries shows how well the economy is performing and guides policy.

Why this matters

The objectives and indicators are the scorecard for the whole national economy section: fiscal policy and monetary policy are the tools the government uses to hit these targets, and inflation, unemployment and growth each have their own dot point. Understanding that the objectives can conflict, and how the business cycle works, lets you explain why a government tightens or loosens policy at different times. Examiners reward candidates who can define GDP and growth precisely and read indicators and the business cycle from data.