The main macroeconomic aims of the UK government - economic growth, low inflation, low unemployment and a stable balance of payments - how each is measured, and the conflicts between them.

What this key area is asking

The SQA wants you to know the UK government's main macroeconomic aims, how each is measured, and why they sometimes conflict. You should be able to name the indicator for each aim (real GDP for growth, CPI for inflation, the unemployment rate, the current account) and explain a trade-off such as growth against inflation. This sets up the policy topic that follows.

The four macroeconomic aims

These aims matter because they capture the wellbeing of the economy: rising output and employment raise living standards, stable prices protect the value of money and savings, and a sustainable external position avoids unsustainable borrowing from abroad.

Measuring growth and inflation

Economic growth is measured by the change in real GDP, the total value of goods and services produced in a year, adjusted to remove the effect of rising prices. Real GDP (and real GDP per head) is the standard gauge of whether the economy is expanding. A recession is conventionally two consecutive quarters of falling real GDP.

Inflation is measured by the Consumer Prices Index, which tracks the price of a representative "basket" of goods and services bought by a typical household. The annual CPI inflation rate is the percentage change in that basket's price over a year. The UK targets 2%: low enough to protect the value of money, but positive to avoid the dangers of deflation (falling prices that can deter spending).

Measuring unemployment and the balance of payments

Unemployment is measured by the unemployment rate, the percentage of the economically active population (the labour force) who are without work but available for and seeking it. Low unemployment means the economy is using its labour fully and avoids the waste and hardship of idle workers.

The balance of payments records the country's transactions with the rest of the world; the part the government watches most is the current account (trade in goods and services plus income flows). A large, persistent current account deficit means the country is importing far more than it exports and relying on inflows of foreign money, which the government aims to keep sustainable.

Conflicts between the aims

The aims cannot always be met together, which is why macroeconomic policy involves choices.

The classic conflict is growth versus inflation: raising demand to grow the economy and cut unemployment can push up prices as the economy nears full capacity. Faster growth can also worsen the balance of payments, because higher incomes draw in more imports. Conversely, fighting inflation by raising interest rates tends to slow growth and raise unemployment. The government must therefore weigh the aims and accept trade-offs.

Worked example: judging the state of the economy

Why the aims matter

The government's aims define what its policies (the next topic) are trying to achieve and how they will be judged. Every fiscal, monetary or supply-side measure is aimed at one or more of growth, inflation, unemployment and the balance of payments, and the conflicts between the aims explain why no policy is a free lunch. This topic is the yardstick for the whole macroeconomic unit.

Try this

Q1. State the indicator used to measure (a) inflation and (b) economic growth in the UK. [2 marks]

• Cue. (a) The Consumer Prices Index (CPI). (b) The percentage change in real GDP.

Q2. Explain one conflict that can arise when the government tries to achieve faster economic growth. [3 marks]

• Cue. Faster growth raises demand and incomes; as the economy nears full capacity this can push up prices (higher inflation), and higher incomes draw in more imports, worsening the current account, so the growth aim conflicts with the inflation and balance of payments aims.