AS/A2 The national economy The UK Economy: a Health Check How well has the economy been performing, and what’s round the corner?

The UK Economy Main macroeconomic objectives Important indicators Long-term economic growth Stability Low inflation Low unemployment (Reduction in poverty and inequality) Important indicators Productivity Interest rates Exchange rates Balance of trade Public borrowing

Macroeconomic Performance Economic Growth and Fluctuations

Economic growth in the UK Labour Conservative Annual growth rate (%)

Growth rates in selected industrial countries UK USA EU12 Japan Annual growth rate (%)

Output gaps in the UK: 1980–2007 Source: based on data in Economic Outlook (OECD, various years)

Output gaps in selected countries: 1980–2007 Source: based on data in Economic Outlook (OECD, various years)

Macroeconomic Performance Economic Growth and Fluctuations

Macroeconomic Performance Long-term Economic Growth

UK GDP at market prices (2001 = 100) Source: National Statistics time series data

Average annual growth rates 1997 to 2007 Source: based on data in OECD Economic Outlook (OECD)

Aggregate demand and aggregate supply AD2 Aggregate demand and aggregate supply AS2 AS Price level P2 Y2 P1 AD O Y1 National output (real GDP)

Aggregate demand and aggregate supply AD2 Aggregate demand and aggregate supply AS2 AS Price level P2 P1 Y3 AD O Y1 Y2 National output (real GDP)

The UK Economy How to increase aggregate supply? More resources Investment Natural resources (e.g. oil) Labour (e.g. from migration or higher retirement age) Greater use of resources (e.g. longer working week) Greater productivity of resources Investment in R&D Greater incentives for efficiency

Productivity in selected countries (UK = 100) Source: Pre-Budget Report 2005 and 2006, Box 3.1, (H.M. Treasury)

International comparisons of Output per Worker (2005) Source: Budget Report 2007, Box 3.1, (H.M. Treasury)

Gross fixed capital formation as a percentage of GDP: 1960–2005 Source: based on data in OECD Economic Outlook (OECD)

Macroeconomic Performance Long-term Economic Growth

Macroeconomic Performance Inflation

Inflation rates in the UK Annual growth rate (%)

Inflation rates in selected industrial countries UK USA EU12 Japan Annual growth rate (%)

Average (CPI) inflation rates 1997 to 2007 Source: based on data in OECD Economic Outlook (OECD)

Macroeconomic Performance Inflation

Macroeconomic Performance Unemployment

UK unemployment rates Annual growth rate (%)

Unemployment rates in selected industrial countries UK USA EU12 Japan Annual growth rate (%)

Average LFS unemployment rates 1997 to 2007 Source: based on data in OECD Economic Outlook (OECD)

Macroeconomic Performance Unemployment

Macroeconomic Performance Balance of Payments

Balance of payments on current account Source: Budget Report 2007, Chart B7 (H. M. Treasury)

Macroeconomic Performance Balance of Payments

Macroeconomic Performance Policy rules

Policy rules Fiscal policy the Golden Rule over the economic cycle, the Government will borrow only to invest and not to fund current spending the sustainable investment rule: net debt kept below 40 per cent of GDP over the economic cycle

Meeting the Golden Rule? But: Public spending increasing more rapidly than Budget Forecast. Is public spending delivering value for money? Curb on real public spending growth from 4.8% over past 6 years to 2.7% next year and 2% thereafter. Source: Budget Report 2007, Chart 2.3 (H. M. Treasury)

Meeting the sustainable investment rule? Public-Sector Net Debt as % of GDP Percentage of GDP Source: Public-sector Finances Databank, Table A8 (H. M. Treasury)

Policy rules Fiscal policy Monetary policy the Golden Rule over the economic cycle, the Government will borrow only to invest and not to fund current spending the Sustainable Investment Rule: net debt kept below 40 per cent of GDP over the economic cycle Monetary policy Bank of England independence Inflation target: 2% CPI inflation (1%) in 24 months’ time

Inflation rates in the UK Annual growth rate (%)

Current CPI inflation projection based on market interest rate expectations Source: Inflation Report May 2007, Chart 5.3 (Bank of England)

Inflation performance and expectations Source: Budget Report 2007, Box 3.1 (H.M. Treasury)

Inflation and Unemployment 75 80 76 74 77 Inflation (%) 79 81 90 71 73 82 78 89 72 70 91 85 69 84 65 88 68 83 62 87 66 97 95 92 86 61 64 67 98 06 94 05 96 63 01 02 93 00 99 60 04 03 Unemployment (%)

The path of inflation and unemployment in the UK? 1975 1980 1990 1978 1972 1984 2006 1997 1967 1993

Macroeconomic Performance Policy rules

Macroeconomic Performance Trade-offs?

Average Inflation and Unemployment for G7 Countries (1997–2007) USA Italy Canada UK France Germany Japan Source: based on data in OECD Economic Outlook (OECD)

Average Inflation and Economic Growth for G7 Countries (1997–2007) Japan Germany France UK Canada Italy USA Source: based on data in OECD Economic Outlook (OECD)

Macroeconomic Performance Trade-offs?

But are we getting happier? Issues But are we getting happier?

Issues Is GDP a good measure? Does material gain = happiness? What about ‘bads’? e.g. commuting costs What about ‘defensive expenditure’ e.g. security What about hours worked and stress at work? What about household debt?

Household debt in G7 countries UK USA Japan Canada Germany Household debt as % of disposable income (%) France Italy Source: based on data in OECD Economic Outlook (OECD)

Index of Sustainable Economic Welfare (ISEW) 1950–96 (max = 100) UK Netherlands USA Source: New Economics Foundation/Friends of the Earth

Issues Is GDP a good measure? Poverty and inequality Does material gain = happiness? What about ‘bads’? e.g. commuting costs What about ‘defensive expenditure’ e.g. security What about hours worked and stress at work? What about household debt? Poverty and inequality

Size distribution of UK income after taxes and benefits by quintile group of households Bottom 20% Next 20% Middle Top 12% 16% 22% 43% 7% Bottom 20% Next 20% 7% 11% Middle 20% Top 20% 44% 16% 22% Next 20% 1996/7 2005/6 Source: ‘The effects of taxes and benefits on household income. 2005/06 (National Statistics)

Issues Is GDP a good measure? Poverty and inequality Social cohesion Does material gain = happiness? What about ‘bads’? e.g. commuting costs What about ‘defensive expenditure’ e.g. security What about hours worked and stress at work? What about household debt? Poverty and inequality Social cohesion

Issues Is GDP a good measure? Poverty and inequality Social cohesion Does material gain = happiness? What about ‘bads’? e.g. commuting costs What about ‘defensive expenditure’ e.g. security What about hours worked and stress at work? What about household debt? Poverty and inequality Social cohesion The environment

For access to free datasets see: http://www.economicsnetwork.ac.uk/links/data_free.htm