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.

2.1.3.a

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.