2.1 Government and the economy

Economic growth:

• definition of economic growth
• measurement using increases in gross domestic product (GDP)
• limitations of GDP as a measure of growth
• the use of diagrams to show the economic cycle: annotating boom, downturn, recession and recovery
• the effect of each stage of the economic cycle on economic growth, inflation and unemployment
• the impact of economic growth on:
  • employment
  • standards of living
  • poverty
  • productive potential
  • inflation
  • the environment.

Low and stable inflation:

• definition of inflation
• definition of deflation
• measurement using consumer price index (CPI)
• types of inflation:
  • demand pull
  • cost push.
• relationship between inflation and interest rates
• impact of inflation on:
  • prices
  • wages
  • exports
  • unemployment
  • menu costs
  • shoe leather costs
  • uncertainty
  • business and consumer confidence
  • investment.

Low unemployment:

• definition of unemployment
• measurement of unemployment using International Labour Organization (ILO) measure
• types of unemployment:
  • cyclical
  • structural
  • seasonal
  • voluntary
  • frictional.
• impact of unemployment on:
  • output
  • use of scarce resources
  • poverty
  • government spending on benefits
  • tax revenue
  • consumer confidence
  • business confidence
  • society.

Define the current account of the balance of payments and deficits and surpluses; distinguish trade in goods (visibles) and services (invisibles); explain links with exchange rates and causes of deficits or surpluses; and analyse the effects of a current-account deficit.

Protection of the environment:

• business activity that damages the environment
• ways businesses damage the environment:
  • visual pollution, including litter
  • noise pollution
  • air pollution
  • water pollution.
• government intervention to protect the environment:
  • taxation
  • subsidy
  • regulation
  • fines
  • pollution permits
  • government provision of parks.

Redistribution of income:

• definition of income inequality
• definition of absolute poverty
• definition of relative poverty
• reasons to reduce poverty and inequality:
  • meet basic needs
  • raise standards of living
  • ethical reasons.
• government intervention to reduce inequality and poverty:
  • progressive taxation
  • redistribution through benefit payments
  • investment in education and healthcare.

Fiscal policy – government revenue and government expenditure:

• definition of fiscal policy
• government revenue – direct and indirect taxes
• government expenditure – main areas of focus
• fiscal deficits and fiscal surpluses
• impact of a fiscal deficit and fiscal surplus
• the impact of fiscal policy on macroeconomic objectives.

Monetary policy – focused on interest rate changes:

• definition of monetary policy
• definition of interest rates
• central banks role in setting interest rates
• impact of changes in interest rates on macroeconomic objectives:
  • the mechanism by which a change in interest rates affects consumers and businesses
  • awareness of asset purchasing used by central banks.

Supply-side policy:

• definition of supply-side policy
• supply-side policy and its impact on productivity and total output
• the impact of supply-side policies on macroeconomic objectives:
  • privatisation
  • deregulation
  • education and training
  • policies to boost regions with high unemployment
  • infrastructure spending
  • lower business taxes to stimulate investment
  • lower income tax rates to encourage working.

Government controls:

• advantages and disadvantages of:
  • regulation
  • legislation
  • fines
  • pollution permits.

The impact of policies and the trade-off between macroeconomic objectives:

• unemployment and inflation
• economic growth and inflation
• economic growth and environmental protection
• inflation and the current account on balance of payments.