1. The Government & The Economy

2. Learning Objectives To understand the Economic Objectives of Governments

3. Government Economic Objectives Low INFLATION Low levels of UNEMPLOYMENT Economic Growth BALANCE OF PAYMENTS – avoiding deficits between exports & imports

4. INFLATION Inflation occurs when PRICES RISE If prices rise rapidly then:  Wages will not buy as many goods  REAL INCOME falls  Higher prices than other countries  less competitive and people will buy from abroad  Job losses  Businesses may shrink and living standards fall THERFORE GOVERNMENT AIM =

5. UNEMPLOYMENT Occurs when people are not working If unemployment is HIGH then:  Level of output will be low  people not producing goods  Government pays unemployment BENEFIT to help  costs government money  public services may suffer THEREFORE GOVERNMENT AIM =

6. ECONOMIC GROWTH An economy grows when level of output in a country increases. GROSS DOMESTIC PRODUCT (GDP) measures the value of goods and services produced in country in one year. Growth = GDP & standard of living

7. IF GDP FALLS……. There is no economic growth causing:  Less output of products  less workers needed  unemployment increases  People can not afford to buy as many goods or services  poor standard of living  Businesses shrink (more unemployment) as people don’t buy products. THEREFORE GOVERNMENT AIM =

8. ECONOMIC GROWTH & TRADE CYCLE DIAGRAM

9. GROWTH GDP is rising Unemployment is falling Living standards are high. Businesses are doing well. The economy of the country is good

10. BOOM Caused by too much spending Prices rise quickly Shortage of skilled workers Business costs rising Businesses are uncertain about the future  will not expand or employ more workers

11. RECESSION When GDP actually falls (goes down) Often caused by a lack of spending People don’t buy products Businesses have falling demand and profits Businesses reduce costs  make workers unemployed

12. SLUMP Serious and drawn out recession Unemployment reaches high levels 10%+ Businesses will lose sales Prices may fall to try to sell products Many businesses will not survive

13. Write down the terms which are MOST appropriate for the scenario TERMS  UNEMPLOYMENT – LOW OR HIGH  INFLATION – LOW OR HIGH  GROSS DOMESTIC PRODUCT - or  LIVING STANDARDS – GOOD OR BAD

14. SCENARIO 1 THE PRICES OF BREAD, MILK, CLOTHES AND OTHER NECESSARY ITEMS HAS INCREASED Answer: Prices going up means that inflation is rising. If prices are going people may not be able to afford products and services as they have less disposable (real) income). The public may seek cheaper goods abroad (importing) causing a balance of payments deficit. In the long run if people are not buying goods then unemployment will rise as businesses will need to cut costs. The standard of living will fall also because people can’t afford to buy as many products. GDP is likely to be level or possibly falling meaning the economy is facing problems

15. SCENARIO 2 UNEMPLOYMENT IN THE COUNTRY IS AT A RECORD LOW Answer: If unemployment is low then there will be many goods and services being made or created. Output will be high. The government is happy as they are paying less benefit and they are earning revenue through tax. GDP will be increasing as more goods are being produced and sold and possibly exported so balance of payments should be at an acceptable level. The standard of living is good as people are in work and have money to spend.

16. SCENARIO 3 OUTPUT OF GOODS AND SERVICES FALLS IN THE COUNTRY Answer: If output is falling less products are being made – possibly due to less demand. This could be because of high inflation. If less products are being made then less workers are needed and unemployment will be rising. GDP and the standard of living will both be falling

17. SCENARIO 4 ECONOMIC GROWTH INCREASES IN THE COUNTRY Answer: GDP is rising which means the economy is growing. Businesses are doing well  more jobs and unemployment is low. People are earning money so have more disposable income to spend  standard of living is good. Government happy as earning tax and paying less benefit`

18. Hold up the term MOST appropriate for the scenario GROWTH BOOM RECESSION SLUMP THEN….. WRITE ON WHITEBOARDS WHAT OTHER EFFECTS THIS MAY CAUSE.

19. SCENARIO 1 PEOPLE ARE NOT SPENDING MONEY Answer: RECESSION – people are not spending money and therefore GDP falls. People may not have money because of being unemployed or because of high inflation. Demand will fall as people are not buying and unemployment will increase further. The standard of living will decline and the government will have to reduce spending on public services due to a lack of funding from Income tax and corporation tax

20. SCENARIO 2 THE NUMBER OF GOODS BEING PRODUCED AND SOLD IS GOING UP Answer: GROWTH – GDP is rising as the value of goods and services is increasing. There is more work available which means low unemployment and the standard of living is good as people earning money and government is too through taxes

21. SCENARIO 3 BUSINESSES ARE LOSING MONEY AND ARE NOT SURVIVING Answer: SLUMP – there has probably been a prolonged recession where GDP has continued to fall and unemployment is very high – standard of living is very low and prices are now very low to try and encourage demand. The businesses who had little reserve capital (to help pay debts) are likely to go bankrupt and disappear (Sole Traders).

22. SCENARIO 4 PEOPLE ARE SPENDING TOO MUCH CAUSING PRICES TO RISE QUICKLY Answer: BOOM – people have spent too much causing inflation to rise which means prices rise. People may also be in debt having spent too much and now can’t afford to. As prices are now high demand is likely to fall. If prices are rising then businesses costs will be rising which will leave them needing to cut costs which may lead to unemployment rising and uncertainty about the future

23. PLENARY EXPLAIN THE OBJECTIVES OF THE GOVERNMENT WHEN MANAGING THE ECONOMY USE AT LEAST 4 KEY TERMS FROM THIS LESSON