Macroeconomic Aims

1. Economic growth

Economic growth is a sustained increase in real GDP (the total output of the economy, adjusted for inflation) over time.

Two key features:

• "Real" GDP, not nominal. Nominal GDP can rise just because prices are higher (i.e. inflation). Real GDP measures genuine increases in output.
• Sustained, not a one-off jump. A single year of fast growth followed by a recession is not really "economic growth".

Most developed economies aim for around 2–3% per year. That rate is fast enough to raise incomes but slow enough not to trigger excess demand-pull inflation.

A definition that just says "increase in GDP" loses the mark. Examiners want real GDP. Without "real", the answer could be describing inflation rather than growth.

2. Low (stable) inflation

Inflation is a sustained rise in the general price level in the economy. The aim of "low inflation" means keeping the inflation rate low and predictable.

Most central banks target around 2% inflation, measured by the Consumer Price Index (CPI) (covered in topic 13).

A low and stable rate matters for two reasons.

• Predictable inflation lets households and firms plan ahead. They know roughly what their wages, prices and savings will be worth in a year's time.
• Very low inflation (close to 0%) risks deflation, which is its own problem (consumers delay purchases waiting for prices to fall; firms cut output; unemployment rises).

The aim is low and stable, not zero. Zero or negative inflation is not the target.

3. Low unemployment / full employment

Unemployment means people who are willing and able to work but cannot find a job. The aim is to keep unemployment as low as possible while accepting that some unemployment is unavoidable.

Full employment does not mean 0% unemployment. There is always some frictional unemployment (people between jobs), so "full employment" means unemployment is at the natural rate, usually around 3–5% in a developed economy.

Different countries have different effective targets:

• A large, slowly-growing economy may consider 5–6% unemployment normal.
• A small, dynamic economy like Singapore may target under 2%.

Within the headline figure, governments often look at sub-groups as well: youth unemployment, long-term unemployment, regional unemployment, and unemployment by ethnicity or gender. A 5% national rate can hide a 20% youth rate, which is a separate policy problem.

4. Balance-of-payments equilibrium

The balance of payments is a country's record of all financial transactions with other countries. The most-watched part is the current account, which mainly tracks exports and imports of goods and services. The aim of "BoP equilibrium" is to avoid a large, persistent current-account deficit or surplus.

A current-account deficit means imports exceed exports; a surplus means exports exceed imports. Either can become a problem if it gets too large and runs on too long.

• A persistent deficit means the country is consuming more than it produces and must finance the gap by borrowing from abroad or running down foreign-currency reserves. Eventually the currency may depreciate sharply or the country may face a balance-of-payments crisis.
• A persistent surplus means the country is producing more than it consumes; it may face foreign exchange-rate pressure and accusations of unfair trade from partners. (Surpluses are usually less worrying than deficits.)

The target is rough balance over the medium term: roughly Exports ≈ Imports for the current account.

5. Equitable distribution of income

Equitable distribution means a fair (less unequal) spread of income across the population, achieved largely through taxation, welfare and public-service spending.

"Equitable" does not mean "equal". A market economy will always produce some income inequality (skilled workers earn more than unskilled; capital owners earn more than wage-only workers). The aim is to reduce the gap between richest and poorest so that:

• Fewer people live in poverty.
• Access to merit goods (education, healthcare) is available to all, not just those who can pay.
• Social cohesion is maintained.

Common policy tools: progressive income tax (higher earners pay a higher rate), welfare payments (unemployment benefit, child benefit, pensions), state provision of merit goods (free schooling and healthcare).