Chapter 5.

Key performance indicators.
There are certain indicators that economist should examine to find out how well an economy is performing.One of them is economic growth.
Economic growth: in the short run it is an increase in real GDP,in a long run-an increase in productive capacity.
Another indicator is unemployment.
Unemployment is a situation when people who are willing and able to work are out of work.Usually,when countries output increases,unemployment falls and economy is thought to be doing well.But some people may not be in the labour force because they are homemakers or disabled.This people are not regarded as unemployed,they are economically inactive (neither employed nor unemployed).
Inflation (sustained rise in price level ) is another indicator of economic performance. But a country may also experience deflation which is an opposite to inflation.
And the last one is balance of payments.This is a record of money flows coming in and going out of the country.

Objectives of the government economic policy.
There are 4 main objectives of the government economic policy:
- Achieve economic growth
- Reduce Inflation
- Reduce unemployment
- Balance of payment(international trade)

Economic growth.
Government wants to achieve economic growth because of the benefits its brings.One of those benefits is an increase in living standards.But it is important for the government to achieve steady and sustainable economic growth.
Steady economic growth means without negative fluctuations in economic activities.
Sustainable economic growth:growth which can continue over the time.
There are two types of sustainable economic growth: the year after year an the generation after generation economic growth.
The first type can be achieved if increases in AS match increases in AD.Government is trying to achieve the actual economic growth by matching trend growth.
Trend growth:the expected increase in potential output over time.It is measure of how fast the economy can grow without generating inflation.

To sustain economic growth from one generation to another the methods of raising productive potential and output must not endanger future generations` ability to grow.This means avoiding depleting non-renewable resources and stop damaging environment,reducing pollution.
EMPLOYMENT AND UNEMPLOYMENT.
High employment and low unemployment is another objective of government policy.Some governments state that their objective is full employment.
Full employment:a situation where those wanting and able to work can find employment at the going wage rate.
As well as trying to ensure that people have job government is trying to encourage more people to enter the work force,because it should increase productivity of the country.
INFLATION.
A third objective is low and stable inflation rate. As well as in case of unemployment,price stability does not actually mean zero inflation,because for a good performance of the country there still should be the small percentage of inflation.For example,the Bank of England set the target to achieve a 2% of inflation rate.
BALANCE OF PAYMENTS
In the past, government wanted to achieve a satisfactory balance of payments. However,nowadays it may not be too concerned in the short term if there are more exports than imports,for example,if this deficit is arising from the imports of raw materials that later can be converted into finished goods that could be exported.There also could be a current account deficit (when more money is leaving the country than coming into).But in the longer run government is still likely to want to see an increase in international competitiveness.

EXCHANGE RATES

Exchange rates: the value of one currency expressed in terms of another.
Free exchange rate system: the value of currency is determined by supply and demand in free market.
Fixed exchange rate:the value of currency is controlled and set by the government.
Managed floating: when the free market operates but the government may intervene.
FREE EXCHANGE RATE/
Demand:the demand for currency comes from people who have other currencies and need to exchange them for that particular currency.
Why there is a demand for any currency?
answer is:
*people want to purchase this countries exports
*they want to invest in this country
So why may people want to invest in another country?
there could be two main reasons for that:
*currency of this country is more stable
*there are higher interest rates,so if,for example,someone will put his/her money in bank of this country he/she will gain more interest from that.

Supply:the supply for a currency comes from people who have that currency but want to change it to another,so there is a supply of this currency.
Why might the supply for something change?
*because people may need to have this currency in order to buy imports
*may be that people want to invest in another country
*also supply may change because of the speculators

Also there is a number of reasons for demand for any currency to increase or decrease.
It is increases because:
*speculators may expect the value of this currency to rise,so they will buy it and therefor demand increases.
*demand for exports of this country rises.
*an increase in investment in this country.
As the result the currency appreciates, there is a rise in the value of this currency.


It is decreases because:
*Invest rates have fallen
*Speculators think that the value of this currency will fall
*Demand for exports have fallen
As the result currency dapreciates.