The Government
&
The Economy
Learning Objectives
• To understand the Economic Objectives of
Governments
Government Economic Objectives
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Low INFLATION
Low levels of UNEMPLOYMENT
Economic Growth
BALANCE OF PAYMENTS – avoiding
deficits between exports & imports
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 =
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 =
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
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 =
ECONOMIC GROWTH & TRADE
CYCLE DIAGRAM
GROWTH
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GDP is rising
Unemployment is falling
Living standards are high.
Businesses are doing well.
The economy of the country is good
BOOM
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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
RECESSION
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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
SLUMP
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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
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
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
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.
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
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
`
Hold up the term MOST
appropriate for the scenario
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GROWTH
BOOM
RECESSION
SLUMP
THEN…..
WRITE ON WHITEBOARDS WHAT OTHER EFFECTS
THIS MAY CAUSE.
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
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
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).
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
PLENARY
• EXPLAIN THE OBJECTIVES OF THE
GOVERNMENT WHEN MANAGING THE
ECONOMY
• USE AT LEAST 4 KEY TERMS FROM
THIS LESSON