The document discusses the UK government's objectives for managing the economy. It outlines four main objectives: economic growth, full employment, low and stable prices, and a balance of payments. It explains each objective in detail, including how they are defined and measured as well as why each is important. It also discusses how achieving one objective may conflict with achieving another and requires trade-offs. For example, economic growth can lead to higher inflation and imbalance of payments. Maintaining price stability and balance of payments may require limiting growth. The government aims to balance these competing objectives to best manage the overall economy.

1. Managing the Economy

2. 4.1 Economic
objectives of the
government
Learning Objectives
Understand what the
economic objectives of the
government are
Understand why these
objectives are important
Understand how ethics
affect the government’s
objectives
Understand how economic
indicators in the UK are
measured

3. 4.1 Economic objectives of the
government
Objectives are aims or goals that the
government would like to achieve
If they achieve these then their
economy is performing well
This is how the government’s
performance is judged
Government feels that if these
objectives are achieved it will be
beneficial for the people and the
country as a whole
There are 4 main objectives
Economic growth
Full employment
Low and stable prices
Balance of payments
Economic objectives –
economic goals that the
government wishes to
achieve to get good
economic performance

4. Economic Growth
Economic growth is measured
by an increase in national income
(an increase in GDP)
Governments would like to have
high growth
Increases in income means
better standards of living
The problem is that high
increases can lead to high
consumer spending which leads
to high prices (inflation)
The government has to make a
trade off and accept a lower rate
of growth
In the UK a good rate of growth
tends to be about 2.5%
GDP – total value of
goods and services
produced by an
economy in one year
GDP /
National
Income

5. Full Employment
Do you think it is possible to get
full employment?
Full employment is not quite the
same as zero unemployment
Full employment is achieved
when those who are actively
looking for employment can find
employment
If everyone is employed there is
more income available to spend
This could lead to rising prices
Again this conflicts with the other
objective
Government needs to make a trade
off – it has to accept low levels of
unemployment to prevent inflation
Unemployment – all
those of working age
who are not currently
working and are not in
full-time education
Full employment –
where all those
seeking work are in
employment
More spending
= more demand
for goods and
services = more
jobs = less
unemployment

6. Stable Prices
Why would government want stable
prices?
It causes uncertainty
Firms like to be able to predict their
costs and if they can’t then they may not
invest
They won’t develop new technology
They won’t grow
The economy won’t grow
Consumers may put off spending
National income will reduce
There will be less goods and services
created leading to?
Less employment
If prices of goods that are exported go
up the country will be less competitive
Less countries will buy exports (because
they are more expensive)
The balance of payments may worsen
(more imports than exports)
Inflation – a persistent
increase in general
price levels
Stable prices – the
average level of prices
is stable

7. Balance of Payments
If a country imports more than it exports
it is buying more than it is selling
More money is flowing out of the economy
than is flowing in
The economy is shrinking (not growing)
The money for the buying has to come
from savings or must be borrowed
If there is more borrowing there will be
more debt
This is not necessarily a problem
If the percentage of borrowing is lower than
the amount that is earned (national income)
the country will be able to pay back the debt
As long as loans are available it should not
be a problem
If there is a high deficit and it lasts
many years there could be a problem
If credit becomes difficult to find there
could be a problem
Balance of payments
– exports minus
imports

8. How ethical issues affect
the achievement of
government objectives
The UK government believes that it is
ethically right to minimise poverty
They also want to minimise income
inequality (the gap between the rich and
poor)
The main way they do this is through
income taxation and welfare benefits
(take from the rich and give to the poor)
Those with a higher income pay a
higher tax
Those on a lower income receive
benefits
The government has to be careful not to
raise taxes too high
High earners would have no
incentive to work long hours
This means that there will never be
complete equality
ethics – the informal
code of how we should
behave – decisions we
all make about what is
morally right or morally
wrong

9. Make a
poster that
includes all
of this!
Research time!
In groups of 4s – assign a leader
Do some research on economic growth in the UK
Areas of research (you could divide this within your team)
Definition of economic growth
How is it measured?
Why is growth important?
What are the benefits of growth?
What are the costs of growth?
Does growth conflict with other economic
objectives?
What % growth does the UK aim for?
How has growth in the UK changed over the last 10 years?
How does it compare with other countries (EU, China, India etc)
How can an economy grow (in the long run and the short run)?
The problems with growth
Make notes for your folders
Make sure you all have a full set of notes that can be discussed in class

10. Economic Growth
Economic growth is measured in GDP –
Gross Domestic Product
GDP is the total value of the goods and
services that a country produces
If GDP increases we say that there is growth
The UK aims to get around 2.5% growth per
annum
They want higher living standards the
population but an increase in GDP does not
necessarily mean that everyone will be better
off
There may be increased inequality
Government will aim to redistribute some of
the income from those earning large amounts
to those that are less fortunate
In the UK growth has allowed them to almost
eliminate absolute poverty but there is still
some relative poverty
Absolute poverty –
those with incomes
lower than the level of
needed for necessities
Relative poverty –
those on lower
incomes than the
country’s average

11. Economic Growth benefits
Economic growth can reduce crime as the
incentive to commit crime is reduced
Economic growth means that if people and
businesses are earning more they can collect
more taxes
The taxes can be used to spend on areas
such as
Improving education
Providing better health services
Providing health education to the poorer sections
of society that tend to have health problems
Improving transport links such as new roads,
railway links and airports
Britain is planning to build HS2 which will connect
the north to the south and the rest of europe
High speed rail has dramatically improved inter-city
transport all over the world in the last 50 years. HS2 will
see Britain adopt the worldwide standard and finally see
the major cities of the Midlands and the North connected
to the extensive, Europe-wide high speed network.
HS2 is vital for
Britain's prosperity
The transport secretary
argues that the high-
speed rail link is
essential for the future
economic wellbeing of
the country north and
south
Guardian – 14./7/2013

12. Economic Growth costs
Higher economic growth means higher
output
This may have negative effects on the
environment such as pollution from higher
factory output
That China's air and water are badly
polluted following three decades of
breakneck growth is not news. But
January's (2013) record-setting bout of
smog got worldwide news coverage and
was so bad some longtime foreign
residents left the country
Traffic congestion can cause problems
are more people can afford cars
House prices can rise so that first time
buyers can find it very difficult to buy
houses
Those that benefit most from growth
tend to be already earning over average
wages – income inequality can increase

13. Economic Growth costs
Those that benefit most from growth tend to be already earning
over average wages – income inequality can increase
Does income inequality matter?
University of Michigan philosopher, Elizabeth Anderson says “It basically
creates a multi-class society — a society in which you have people who have
to flatter and endear themselves and have to be servile. And other people
dominate.”
Toyama (University of California) says that
eliminating suffering is what matters most.
Beyond that, extreme wealth is an incentive
for people to work harder.
He is talking about redistribution – government taxing
the rich and distributing it to the poor to eliminate
the suffering
When inequality becomes extreme, it
undermines democracy argues the late
philosopher John Rawls. One person, one vote — yeah.
But one person with millions to spend has much more influence.
Pogge (Yale Professor) says The size of the rich-poor gap matters -Some
inequality is acceptable to pretty much everyone these days. No one is
arguing for a fully equal society. But the degree of inequality really does matter
when you’re trying to determine whether inequality is moral or amoral. When
extreme inequality sets in, that’s when social and political problems follow.

14. Growth conflicts with other
economic objectives
If we have growth we have spending
This spending pushes increases
demand which increases prices
Resources such as labour are more
fully used (unemployment reduces) which
means these resources become more
scarce
As they become more scarce the price
(the wages) increase
As wages increase the cost of
production increases
These costs will be passed onto the
consumer
If average price levels increase this
means we have inflation
The objective of low inflation may fail

15. Growth conflicts with
other economic
objectives
If consumers have more to
spend they will spend more
on imports
This is because the UK has
a high propensity to spend
on imports (they like
spending on imports)
If more is spent on imports
than exports there will be a
worsening of the balance of
payments
The objective of improving
the balance of payments fails
unless growth is as a result
of an increase in exports but
this is rare in the UK

16. Economic Cycle
The UK objective is to have 2.5% growth on average per
year
Over time there will be different rates and the pattern tends
to be cyclical (it is repeated) as seen in the diagram below
The stages of the economic cycle are boom, recession,
slum and recovery

17. Economic Cycle - Boom
During a boom economic growth
will be above average
Consumer spending is likely to be
high as people feel confident and
will borrow money to spend
Because people are spending
there is a high demand for goods
and services
If there is a high demand for
goods and services there will be a
high demand for labour to make
them
Unemployment will be falling or
low
Businesses will also be confident
and will start to invest
Prices may start to rise (inflation)

18. Recession
In the UK a period of recession is defined as 2 quarters (6
months) of negative growth
Growth is below the average rate
Consumer spending is likely to be low as people lose
confidence in the future and worry about losing their jobs
Because people are not spending so
much there is a low demand for goods
and services
If there is a low demand for goods and
services there will be a low demand for
labour to make them
Unemployment will increase
Businesses will also be less confident and
will stop investing
Prices may start to fall (inflation will reduce)
Balance of payments may improve because there is less
spending on imports
This depends on what happens to exports

19. Slump
If the recession continues and worsens it
could turn into a slump
Consumer confidence will be very low
because they have no confidence in the
economy
They will put off spending
They will feel very insecure about their
jobs in the future
Inflation may be very low or falling
unless prices of oil or other external
factors are increasing
Businesses will hold onto their cash in
case there is another recession and won’t
invest
Unemployment is likely to be high
Prices may even begin to fall (deflation)
Imports will suffer and the BoP is likely to
improve

20. Recovery
This is when economic growth
starts to get better
Growth will be positive again
Confidence will start to return
to both consumers and
businesses
Consumers will start to spend
more
Businesses will start to invest
some of the cash they have been
holding back
Unemployment should stop
rising but may take some time to
recover
Inflation may start to increase

21. Research time!
In groups of 4s – assign a leader
Do some research on Inflation in the UK
Areas of research (you could divide this
within your team)
Definition of inflation
How is it measured?
What causes inflation?
What % inflation rate does the UK aim
for?
Who has responsibility for controlling
inflation in the UK?
How do they do it?
How has inflation in the UK changed
over the last 10 years?
What is the inflation rate now?
What is hyperinflation and deflation?
Which countries have suffered from this?
What are the costs of inflation?
Make notes for your folders
Prepare a PowerPoint presentation to be
given to the class

22. Inflation
 Watch Inflation Videos (4)
http://www.youtube.com/watch?v=-d0-8tr6DGo&list=PLslyOrpjJ0
http://www.youtube.com/watch?v=7I48BA9-iu4&list=PLslyOrpjJ0
http://www.youtube.com/watch?v=aSWgRuJJ9-c
http://www.youtube.com/watch?v=-pwincsv4E0

23. Second Macroeconomic objective – Stable prices
This is all about inflation
By the end of this section you will understand
How a rise in the cost of living affects the value of
money
How changes in the value of money are measured
What is the Retail Price Index (RPI) and the Consumer
Price Index (CPI)
The meaning of inflation
Why it is important to keep inflation stable
What causes inflation
What policies can government use to keep inflation
stable

24. The value of money
The value of money is the goods and services we can
buy with money
If the amount of goods and services you can buy with a
sum of money changes then there has been a change in
the value of money
If prices are rising we say there has been a rise in the
cost of living
it costs us more to live because we can get less for
our money
we can buy less for £1 this year than we did in the
previous year
If prices are falling we say that there has been a fall in
the cost of living
Getting more goods and services for our money –
for our £1 we are buying more than the previous year
It is costing us less to live
The amount we can buy for a certain sum of money is
called the purchasing power of money
In 1970 I could have bought 11 loaves of bread for £1,
by 2000 I could have bought around 2 and this year I
would be lucky to get 1
http://www.bankofengland.co.uk/education/inflation/prices/prices.htm

25. Measuring changes in the
value of money
It does not mean that we are worse off if
the cost of living goes up (if prices go up)
Our standard of living depends on both
prices and our wages
If prices go up and our wages stay the
same our standard of living has gone down
If prices go up and our wages go up at
the same rate then our standard of living
remains the same
If prices go up and our wages go up at a
higher level then our standard of living
goes up
So…if prices are rising the value of
money is going down but standards of
living could be rising, falling or staying the
same.

26. What does this picture show?
1970 2000

27. The Retail Price Index (RPI)
Government uses the RPI to
measure changes in the value of
money
Over a number of years it measures
the price of a typical basket of goods
that a family spends its money on
If there is a general rise in prices
then the index will rise and the
country will experience inflation
Inflation is not about one or two
goods/services rising in price – it is
about the whole basket of goods – a
‘general’ rise in prices
However remember that prices (in
general) always rise from year so
even if inflation is falling it does not
mean that there is not a rise in prices
it just means that the prices are not
rising as fast as they were before

28. How is the RPI worked out?
Government chooses a particular date and calls
that the base date. The year in which the base date
occurs is called the base year
They then work out what is contained in a typical
basket of goods – the things that an ordinary family
would buy on a regular basis
They then record the price of each good and give it
a weight according to the importance of this good to
the family (the percentage of income spent on each
good).
 If more of the family’s income is spent on food
this will have the highest weighting and so a
change in price will have a bigger effect on the
index
Then the price of the whole basket is worked out
and is given an index number of 100 in the base year
The price of the basket in future years is shown as
a percentage change from the base year.
If the RPI is 105 in the year after the base year
then the basket of goods has gone up 5%
If the RPI was 110 the following year there has
been a rise in the prices of goods of 10% since
the base year

29. • What is the rate of inflation in year 2?

30. • What is the rate of inflation in year 2?
• 20%

31. Problems with working out the RPI
There is no such thing as a typical family – we all buy differently
for example poorer people may spend more of their income on
food than the rich; the elderly will have completely different buying
patterns than the young
The items in the basket change all the time - new things such as
computers etc have to be added. As well as adding new items
government also rebases the RPI from time to time
Prices vary from place to place
Buying habits change over time so weightings need to be
adjusted
A large part of the RPI is the price of housing however this
changes according to changes in interest rates – this can distort
the RPI figure

32. Consumer Price Index (CPI)
Another price index introduced by the
government in recent years is the CPI
One of the reasons that the UK government
started to use the CPI as well as the RPI is that it
removes a couple of the problems we just
discussed
It does not include spending by the elderly and
does not include spending on housing and so it is
seen as a truer measure of inflation
The Government uses these indices to work
out how much it should pay in benefits to the
elderly, to the poor, in pensions, tax allowances
etc
These benefits will have an effect on people’s
incomes and therefore what they spend which in
turn will have an affect on the prices of goods
(supply and demand!!)
This is why people say that the price rises
reported by changes in the RPI are overstated
(are larger than they should be) and the CPI is
better.
Also other European countries use the CPI so it
is a good way of comparing inflation from country
to country

33. Why does government want to control inflation
What does this diagram illustrate?

34. Why does government want to control inflation
What does this diagram illustrate?
A rise in prices (inflation) pushes workers to demand higher wages
which pushes up production costs which are then passed onto
consumers
Again higher prices lead to workers demanding higher wages which
pushes up production costs which pushes up prices
This become a vicious cycle where prices keep getting pushed up

35. The problems caused by inflation
Inflation is unfair to creditors (people
who are owed money)
If money is lent at a fixed interest
rate and prices start to rise the value
of the interest paid will fall
Money used to repay the loan will be
worth less than at the time it was
borrowed
Inflation is unfair on savers
The value of people’s savings will
fall in times of inflation unless the
interest rates are above the rate of
inflation
Savers will be put off saving
Inflation causes a fall in investment
Businesses will not invest if there is
uncertainty about prices – if they can’t
forecast the costs or the revenues of
a project they may be reluctant to
invest
Uncertainty leads to less investment
which will mean less growth in
production and less growth in

36. The problems caused by inflation
Inflation may cause industrial unrest
Workers may ask for rises in wages to make
up for the rise in cost of living
The rise they ask for may be to cover the
increase in prices they see today and in
addition what they expect in the future (if they
have seen continual rise in inflation)
If wages increase firm’s costs go up and
their prices will increase leading to further
inflation – this is known as wage-price spiral
If employers try to resist increasing wages
this may lead to industrial action (strikes etc)
Inflation may increase imports and decrease
exports
If prices are rising a country may become
uncompetitive internationally leading to a
decrease in exports
If prices are lower in other countries imports
will increase – firms will always try to buy the
cheapest inputs to keep their costs down so
they may buy these from abroad

37. The problems caused by
inflation
Inflation could become hyperinflation
If inflation starts to rise rapidly people
may lose faith in money – it becomes
worthless
By the end of 1923 the value of the
German Mark was halving in value
every hour
The price of a newspaper reached
20,000 million Marks
This has happened in other countries
such as Argentina and Israel
http://www.bankofengland.co.uk/educ
ation/inflation/map/map.htm

38. The causes of inflation
Cost push inflation
When a factor of production increases
in price the cost of production increases
which pushes up the price of the good or
service e.g. oil or wages
Demand-pull inflation
When supply cannot keep up with
demand for goods and services prices
will be pushed up
Rapid increases in the money supply
Money supply is the total amount of
money in the economy
If people/businesses have more
money they will demand more goods
and services
Increases in demand will push prices
up

39. Government policies to deal with inflation
The correct policy to deal with inflation will depend on
what is causing it
Monetary policy (changing interest rates by the central
bank)
Government can reduce consumer and business
spending by increasing the interest rate
The cost of borrowing increases so less is borrowed
The problem is that if people stop spending and
businesses stop investing this will have a negative
effect on growth
In the UK the Bank of England’s MPC are in charge
of monetary policy
Fiscal policy (government spending or taxes)
Government can stop spending so much
It can also raise taxes so consumers have less
income to spend which would reduce consumer
demand
The problem is that this could cause unemployment
– as demand for goods decreases demand for labour
will decrease
Monetary policy is the main tool used to fight inflation

40. Research time!
INDIVIDUAL WORK!!
Do some research on Balance of Payments
(BoP) in the UK
Areas of research
Definition of BoP
How is it measured?
What affects the Balance of Payments
Does the UK have a surplus, balance or
deficit?
Why does it have this?
What is the UK doing to improve its BoP
Who are the UK’s trading partners
What does it export/import most?
Make notes for your folders

41. Balance of Payments
GCSE Yr11 Econ

42. What is the Balance of Payments?
The balance of payments (BoP) records the many
financial transactions that are made between
consumers, businesses and the government in the UK
with people across the world.
The BoP is Exports minus Imports
The BoP figures tell us about how much is being spent
by British consumers and firms on imported goods and
services
Its also tells us how successful UK firms have been in
exporting to other countries and markets.
It is an important measure of the relative performance
of the UK in the global economy (the 4th
Macroeconomic
objective)

43. The importance of exports for the economy
Why is the export sector of the economy vital for the UK?
GDP: An increasing share of Britain’s national output is exported overseas as
the nation becomes more integrated into the global economy.
 If British companies can successfully sell goods and services overseas, the rise
in exports boosts national income and will help reduce unemployment.
Manufacturing industry: Export sales are particularly important for
manufacturing industry
 exports are over fifty per cent of total production.
 Thousands of jobs depend directly on the performance of the export sector and
even more are affected in industries that supply materials to the manufacturing
industry.
Regional economic health: The relative success of failure of export industries
is important for certain regions of the UK.
 When export sales dip, output, employment and living standards come under
threat and threaten to widen the existing north-south divide.

44. The importance of exports for the economy
The UK has a deficit on its BoP
The UK has a surplus on trade of services (invisible
trade)
This surplus is not big enough to make up for the
deficit on the trade of goods (visible trade)
Overall it imports more than it exports

45. Reasons for the UK deficit?
This is partly because British people have a ‘high propensity to
import’ which means they really like importing foreign goods
 When incomes are high consumer demand is strong, the volume
of imported products grows quickly so during a boom or recovery
the BoP may get worse
 This means that when income falls (during a recession) the BoP
may improve
Long-term decline in the capacity of manufacturing industry
because of de-industrialisation
 There has been a shift of manufacturing production to lower-cost
emerging market countries and then export products back into
the UK.
 Many UK businesses have out-sourced assembly of goods to
other countries whilst retaining other aspects of the supply chain
such as marketing and research within the UK.
In the UK North Sea Oil and Gas production has fallen and so
there has been a sharp rise in imports of oil and gas

46. Does it matter if exports are falling?
Here are some of the main effects of a fall in export sales:
Reduction in GDP: A decrease in exports means less income flowing into the country
Lost jobs: There will be a loss of employment if exporting industries require less labour
and if UK businesses lose market share and output to cheaper imports from overseas.
Dip in business confidence and investment: exporting companies will lose confidence
if their overseas orders are decreasing. They will be put off investment in future growth
Reductions in inflationary pressure: If exports fall, GDP will fall and so will price levels
Overall, a decline in exports will leave the economy with spare productive capacity –
resources that they are not using such as unemployment unless extra spending on goods
and services can be found in other parts of the economy.

47. What can be done to improve the BoP?
Encourage consumers to buy British – the UK government can support UK advertising
campaigns and encourage public broadcasting companies like the BBC to produce
programmes e.g. cookery programmes where chefs buy local and British
Increase productivity so that manufacturing firms become more competitive
 Incentives like grants or tax relief to encourage development in areas where employment is
low
 Tax relief on research and development to help improve innovation of products and
processes
 Reduce or remove laws that protect workers such as ‘unfair dismissal’ so that firms can hire
and fire more easily
 All of these things are called supply side policies – they improve the productivity of the
economy (allow the supply to increase hence supply side)
Encourage research and development into alternative fuels and drilling techniques
so that oil and gas exports can be reduced
 For example fracking is a new way of getting gas that would increase the availability of gas in
the UK and reduce imported gas
 Wind turbines or Solar panels may reduce electricity imports

48. Government Policies
Policies used to achieve the 4
macroeconomic objectives

49. Fiscal policy
Fiscal Policy is taxation or government spending
Government can use taxation to change consumer spending (C)
If they can increase C they can increase aggregate demand (AD) and maybe
help the economy out of recession
If AD increases then so does GDP (growth)
How can they use taxation to increase consumer spending?
If people have more disposable income they can spend more
If the government decreases income taxes there will be more disposable
income and therefore they can spend more
The other tax they can reduce is VAT
If VAT is reduced then goods will cost less and people can spend more
Fiscal policy could also be used to cut back on spending that is causing
inflation but they don’t often do this; they use monetary policy to do that
(later)
Aggregate Demand (AD) is
the total demand in the
economy. AD = GDP

50. Fiscal policy
Government spending is also part of AD
If they increase their spending then G will increase and so
will AD
That means more growth
The problem with the spending is that the money needs to
come from tax or borrowing
If they tax more they will reduce spending
If they borrow more they will get into debt
In the UK they didn’t want to use government spending to
get out of the recession because the country was already in so
much debt Aggregate Demand
(AD) is the total
demand in the
economy. AD = GDP

51. Monetary Policy
Monetary policy is controlling interest rates
Monetary policy is traditionally used to control
inflation
If AD increases then prices go up and so we get
inflation
Inflation reduces the value of money so the Bank of
England tries to control it and keep it around 2%
It does this by putting the interest rates up and
down
If the interest rates go up then consumer spending
will go down
This is because their disposable incomes will be
less; it will cost them more to use their credit cards or
to get loans and mortgage payments will increase
If their spending decreases then so will inflation
The problem with increasing interest rates is that
the cost of borrowing to businesses increases and so
they may decide to put off investing
This will affect the long term growth of the
economy

52. Monetary Policy
If the interest rates go down then
consumer spending will go up
This is because their disposable
incomes will be increase; it will cost
them less to use their credit cards or to
get loans and mortgage payments will
less
If their spending increases then so
will inflation
So if inflation is getting too low (and
growth is very slow) the Bank of
England may lower interest rates
This only really works if consumers
have confidence in their future
Otherwise they may decide to save
any extra income they have

53. Supplyside policies
Supplyside is all about increase how
much an economy can supply or
produce
This is called an economy’s
productive potential
If it can produce more it can grow
more in the future
Supplyside policies are used to get
long term growth
Government cannot really do much
directly. It is really up to businesses
It can create the right conditions
There are two ways to increase the
country’s productive potential
1. Increase the quantity of factors of
production
2. Increase the quality of factors of
production

54. Supplyside policies
The main way of increasing the
number of factors of production is to
increase the number of people in your
workforce
This can be done by allowing
immigration
Or by helping the long term
unemployed back to work
The government has just announced
that it will make those that are on long
term unemployment benefits to do
community service work and go to the
job centre to look for jobs every day
Government is also trying to make it
easier for firms to hire more people by
changing some of the laws that make
firm’s nervous to hire such as ‘unfair
dismissal’

55. Supplyside policies
The main way of increasing the
quality of factors of production is to
invest in training and development
Government won’t do this
directly but they can encourage
firms to do it by giving them tax
relief
They can also encourage firms to
invest in research and development
so that they can find ways of
improving processes
This will also allow firms to
innovate and bring new products to
market

56. Supplyside policies
One way that government can
directly help the country increase its
productive potential is to invest in new
infrastructure
Infrastructure is roads, airports, sea
ports, trains and train networks,
communications networks etc
If there is good infrastructure goods
and services can be moved around the
country
For example if companies can easily
get their goods to airports or sea ports
because government has invested in
high speed trains or a good road
network they can then exports and
increase their sales
 If they increase their sales this
is money coming into the
country (an increase in GDP)
which helps the government
achieve one of their macro
objectives (growth)
 At the same time exports are
increasing so the balance of
payments is improving

57. Supplyside policies
The current UK government wants to build a new rail
network called HS2 which will link major cities throughout the
UK
The UK is already connected to Europe by train but the
network within the country is quite old and slow
There are social benefits (private benefits plus external
benefits)
What do you think these are?
 Businesses can get their products to market much
faster and therefore sell more
 Businesses get better and quicker access to European
markets and other international markets (if it links
with airports) – sell more
 If businesses can sell more this will lead to an increase
in GDP
 If businesses can export more there will be an
improvement on the balance of payments
 Individuals could live in one city and work in another
giving labour mobility - if there are jobs available but
not in your area you can find an alternative more
easily – leads to less unemployment
 Overall the productive potential of the country is
increasing

58. Supplyside policies
In the short term there will be very high social
costs
 It will be very expensive to build and use tax
money that might be used to build hospitals
or other infrastructure
 The railway lines will be built through land
where there is housing that will need to be
demolished and countryside that is currently
unspoilt
 There will be additional pollution (negative
externality)
Should they go ahead?
The government will need to see if the social
benefits outweigh the social costs before going
ahead
It is likely that the short term costs will be higher
than the short term benefits but in the long term
the benefits will be much higher and this project
will increase the productive potential of the country
and therefore increase long term GDP (Growth is
the most important objective of the country)

59. Market Failure

60. Learning Objective:
To understand the different types of
economies
To gain a general understanding of the
different types of market failure
Learning Outcome / Success Criteria
Name the different types of market failure
Give examples of the different type of market
failure

61.  What do you know about the
different types of economies?
 Two main systems today
 Free market
 Mixed economy
 Free market
 Economic activity occurs through
private business and private
individuals
 Businesses exist to make profit
 Competition helps to keep prices
low and quality high
 Consumers can buy whatever
they want if they have the money
 Governments exist but are more
concerned with making sure the
law is complied with
Free market economy
– a system where all
economic decisions are
taken by private
individuals

62.  Drawbacks of a free market economy?
 Some businesses may monopolise the
market and not provide low prices and
high quality
 Consumers may not be able to afford
vital goods (poverty and inequality are
more likely)
 Mixed Economies
 Almost the same as a free market
economy but governments take a
bigger part
 They provide services that are
deemed vital like health and
education
 All developed countries operate as
mixed economies
 The balance between private
business and government differs
between countries
Mixed economy – a
system that is partly a
free market economy
but also has
government
involvement in
economic decisions

63.  How could we define the perfect market?
 A free market that supplies exactly what
consumers demand
 So market failure can be
1. When the free market fails to provide at
all
2. When the free market provides too
much
3. When the free market provides too little
4. When the free market provides but it
has an effect on a third party that is not
involved in the production or
consumption (that effect can be good or
bad)
 On the next slide I am going to show you
some examples of market failure
 In pairs, I want you to take 10 minutes to
 Decide what kind of market failure each
one is
 Think about the reasons why the market
fails
 E.g. what would make the market fail
to provide?
Market Failure: a
failure of the market
to allocate
resources efficiently

64. 1
2
3 4

65.  So which is number 1?
 It is a vaccination service
 It is known as a merit good
 Merit goods are often services
 The government thinks that merit goods
provide positive benefits for both the
people that use them and society as a
whole
 Why in this case?
 They should be consumed to a greater
degree
 Because the market doesn’t provide
enough (because there is not enough
demand) the government has to step in
 How can it supply more?
 It can provide them directly
 It can subsidise them so that there is no
direct cost to the consumer
 Why no direct cost?
 Because they pay indirectly through taxes
Merit goods are products
that society values and
judges that society should
have regardless of
whether an individual
wants them – they are
under consumed by
society because the
benefits of the good are
not fully appreciated by
society

66. Information failure: merit goods
Merit goods are products that society values and judges that society
should have regardless of whether an individual wants them
It is important to remember that to classify a good as a merit good will
require society to make a value judgement
The UK government believes that individuals may not act in their own
best interest in part because they do not have the full information on the
long term benefits (information failure)
Merit goods are an example of partial market failure – where the free
market will lead to the provision of a product but in the wrong quantity
leading to a misallocation of resources
Government will seek to encourage more consumption of merit goods

67. Why is this a merit good?
If the government didn’t provide schools
would everyone pay for it?
Maybe you would be too poor to afford
it and leave your kids at home
The market would not provide enough
so government has to step in
Education and
healthcare in the
UK would not be
produced in
sufficient quantity
by a free market
because
consumers would
not want to
purchase enough
of these services.
This is because
they may not have
enough knowledge
to assess the true
private benefits.
Private benefit –
the benefit to
private businesses
or individuals

68. Why are these Merit
Goods?
Would government
provide or subsidise
these services to
the same extent?
Some will be more
important than others and
will gain more funding

69. Positive externalities
Merit goods tend to have positive
externalities - that is they have
positive benefits to those not
involved in the transaction
The social benefits are greater than
the private benefits
In the case of the library the benefit
to a person (private benefit) is to
become better educated
The external benefits are that the
economy may grow because the
labour force is better educated and
more efficient
The social benefit is both of these
put together.
Private benefit – the
benefit to private
businesses or individuals
Social benefits =
private benefits plus
external benefits
External benefit–
the benefit to the
third party not
involved

70.  So which is number 2 – over/under
provided, 3rd
part effects, not provided?
 It is fast food
 It is known as a demerit good
 The government thinks that demerit
goods are bad for both the people that
use them and society as a whole
 Why?
 They should be consumed to a lesser
degree
 Because the market provides too much
(there is too much demand) the
government decides to step in
 How can it reduce supply?
 It could ban them
 It could educate consumers on the harm
 Anything else?
 It could put a tax on them
 How would that work?
Demerit goods are
those products that
society deems as bad
for you - again a value
judgement is being
made

71. Why are these Demerit
Goods?
If government
chose tax to
reduce alcohol
consumption
would it tax the
same % as
cigarettes?
Cigarettes may be seen as
more harmful than others
and have higher taxation

72.  So which is number 3? Over/under provided, 3rd
part effects, not
provided?
 It is a factory creating pollution
 It is known as a negative externality
 What is the cost imposed on the third party here?
 The pollution may cause harm to society – the fumes may cause ill
health to those that are not involved in the production
 When the firm decides how much to provide what will it think about?
 It is a profit maximiser
 Costs will be the most important thing – if costs are low profit will be
high
 It only thinks about its private costs; not the cost to society
 Together all the firms in the market provide too much so the
government feels the need to step in
 What could it do to get the market to supply less (and therefore pollute
less)?
Negative Externality:
costs imposed on a third
party not involved with
the consumption or
production of the good

73. What can government do to fix externalities?
Regulation – government can set restrictions
and inspect to see these are being upheld. If not
large fines may be levied
Pollution permits – essentially using the market
to address the problem rather than through
regulation.
Government issues or sells permits to firms
allowing them to pollute to a certain limit
This increases their costs
But…they can be traded to reduce the cost
creates an incentive to be clean because
they can sell on remaining allocation.
Firms that pollute will have higher costs
than those that are clean
Regulation is the stick and the pollution permit
is the carrot
Downside –
Both need teams of inspectors
Firms may move to countries that do not
penalise e.g. India

74. Negative
externalities
Why is this a negative
externality?
What is the private
cost?
What is the external
cost (the cost to the third
party)
The social cost is both
of these added together
In a perfect market the
private costs would be the
same as the social costs
Because the social cost
is larger than the private
cost there is market
failure
Private cost – the cost to
private businesses or
individuals
Social costs = private
costs plus external
costs
External cost– the
cost to the third
party not involved

75. Negative
externalities
Why is this a negative
externality?
What is the private cost?
What is the external cost (the
cost to the third party)
The social cost is both of
these added together
In a perfect market the
private costs would equal
what?
They would equal the social
costs
Because the social cost is
larger than the private cost
there is market failure

76. Negative
externalities
Why is this a negative
externality?
What is the private cost?
What is the external cost (the
cost to the third party)
The social cost is both of
these added together
In a perfect market the
private costs would equal
what?
They would equal the social
costs
Because the social cost is
larger than (?) there is market
failure
 ? = the private cost

77.  So which is number 4? Over/under
provided, 3rd
part effects, not
provided?
 It is a light house
 It is known as a public good
 There is a missing market
 Why would the market not provide
it?
 Watch this mjmfoodie video (3
mins)
 ........videosfoodiemicroEpisod
e 33 - Public Goods (Version 2 -
amplified audio) - YouTube.flv
Public Good:
goods that would
not be provided by
the free market

78. Public goods
Pure public goods have three
main characteristics:
Non-excludability:
The benefits of public goods cannot
be confined to those who have paid
for it
Non-payers can enjoy the benefits
of consumption at no financial cost to
them
Non-rivalry in consumption:
Consumption of a public good by
one person does not reduce the
availability of a good to others
In other words, if the good is
provided for one person it must be
provided for others
Non-rejectable
If a public good is provided, we
cannot avoid it
Why would the
‘market for viewing
the sunset’ be a
missing market?

79. Why are these
public goods?
Non-
excludablity?
Non-rivalrous?
Non-rejectable?

80. Why is this park bench a public good?
Non-excludablity?
Non-rivalrous?
Non-rejectable?

81. Could we make it into a private good?
Watch this video!! ........videospublic
goodsPAY SIT the private bench (HD) on Vimeo.flv

82. The Welfare State
and its alternatives
GCSE Econ Unit 12

83. What is the welfare state?
This refers to various forms of
benefits payments and services which
are designed to help those in need
The benefits are paid for by tax
revenue collected from the
government
Those who earn higher than average
incomes pay a greater proportion of
their income as tax than those on
below average incomes
Welfare State: financial
or practical help for
those who need most
support

84. Over 65s can claim if they need
help with personal care due to
illness or disability
Given to people who have to
look after someone with
substantial caring needs
Given to families with children
under 16
helps with some of the extra
costs caused by long-term ill-
health or a disability if you’re
aged 16 to 64.
Universal Credit will eventually replace:
Income-based Jobseeker’s Allowance
Income-related Employment and
Support Allowance; Income Support;
Working Tax Credit; Child Tax
Credit;Housing Benefit

85. Benefits of the welfare state
Poverty is reduced
 Money and help is given to those who
cannot work and earn their own income
e.g. unemployed, elderly, disabled, retired
etc
 The poorest members of society avoid
falling into absolute poverty
Inequality is reduced
 The money comes from higher earners in
the form of tax revenue
 This distributed to the poorest proportion
of the population
 This should reduce the gap between the
rich and the poor
 This is seen as ethically correct
 In addition, societies with more equal
distribution of income suffer fewer social
problems e.g. crime

86. Benefits of the welfare state
Overall health of the population is increased
 Everyone in the UK benefits from the
welfare state because everyone has access
to education and health care
 The NHS provides healthcare and medical
treatment free of charge (apart from
prescription charges)
 If healthcare was left to private firms some
lower income people may not be able to
afford to buy it which would mean their
health would suffer
 If the population is healthy it is more
productive
 If it is more productive it creates more
income
 More income means more GDP =
economic growth
 The welfare state improves the health of
the poorer segments of the population

87. Downsides (costs) of the welfare
state
Removal of incentives to find work
 Some people think that if you give the
unemployed benefits that it will remove the
incentive for them to work
 In some cases the benefits will almost
provide the same income as from low paid
jobs
 It is possible that some will not search for
jobs as urgently as if there was no (or
smaller) benefits
High Taxation
 Those in employment on average and above
average incomes will pay a higher proportion
of their income in tax than if there was no
welfare state
 Some believe that this is unfair
 They believe that this is unfair

89. Alternatives to the welfare state
Increase the role of the voluntary sector
 Most politicians agree that there should be a welfare
state but some argue for reform
 The first idea is to get the voluntary sector (charity
sector) more involved
 Charities in the UK employ over ½ million workers
Modify the welfare state
 Make benefits universal
 It is expensive to work out who should have and
who shouldn’t have benefits and how much they
should have
 It would be less costly to give to all
 Child benefit was once universal but how if one
person in the family earns over 50,000 they don’t
get it
 Have benefits only for those meeting certain
conditions
 Only those who need benefits receive them
 Saves money but is expensive to administer