Governments will try to manipulate and control the economy - to improve economic performance
Most governments will have targets relating to:
Economic Growth
Inflation
Unemployment
Current Account Balance
Government Budgets/Budget Position
The Environment
Income Inequality/Income Distribution
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Economic Growth
Governments want to maximise the economic growth rate of their economy
As an economy grows, the standard of living should improve - making a stronger economy
In low to middle income countries, high growth rates are possible - and 10% may be a target
These countries are moving from low productivity agricultural jobs to higher productivity manufacturing jobs - meaning the workforce can produce more, achieving high growth rates
In the high income countries, lower rates of growth are realistic - around 2.5% being a common target
These countries have been through the process of industrialisation, with high productivity, meaning limited economic growth
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Inflation
Targets for inflation are set by governments and central banks around the world
These will aim for low, stable and predictable positive inflation
Governments fear high inflation - due to having more costs associated with it
Governments also fear deflation due to the negative effect on economic growth
UK has a inflation target of 2%
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Unemployment
Governments want to keep unemployment as low as possible
Impossible to achieve 0% unemployment - due to frictional and seasonal unemployment
Most governments will aim for a low unemployment without causing inflation
Around 5% is a reasonable target for developed economies
Governments have focused on increasing the number of people in employment, as well as reducing unemployment
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Current Account Balance
Most governments want the current account balance to be in balance over time
Surpluses are often seen as a sign of a strong economy
Deficits are often seen as a sign of a weak economy
However, reality is more complex - some countries can run large prolonged deficits with no consequences
Large deficits are avoided, as they can cause signficant problems
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Government Budgets/Budget Position
Governments want to manage their budget position
The government accepts that they may need to have a deficit at times(when tax revenues are low and government spending increases - in a recession), but should be able to pay for these when tax revenues and spending falls (in a boom)
However, since the financial crisis of 2008, the size of budget deficits has become more of a focus for governments
After the financial crisis of 2008, people became unemployed so budget deficits grew in many countries - reducing tax revenue and increasing government spending
As budget deficits increased, national debt also increased
The increases in budget deficits and the national debt became unsustainable, and reducing budget deficits became a more more important policy objective
There is an argument about the best way to reduce deficits - some believe it should be done quickly, even if it reduces growth
Others believe slow reduction of the deficit can allow the economy to grow, which will cut the deficit further
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The Environment
The impact on the environment of economic activity is difficult to measure
The government will have a wide range of targets(e.g. from air quality to litter to global warming)
However, most governments are trying to limit their impact by agreeing to CO2 emission targets
The effect of growth on the environment is debatable - some say growth uses resources and damages the planet; others argue that growth allows new technologies that can reduce pollution
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Income Inequality/Income Distribution
Different governments will have different views on income inequality
RIGHT-WING ECONOMISTS: argue that income inequality creates an incentive to work and improve yourself; they don't use policies to improve inequality
LEFT-WING ECONOMISTS: feel that it is more important to be fair and everyone should have access to a certain standard of living; they would intervene in the market to help improve equality - through minimum wages, maximum prices, providing healthcare and education, or redistributing income through taxation and government spending
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