Steering the economy
A HM Treasury case study

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Page 1: Introduction

Hm Treasury 5 Image 1In providing an overview of the workings of the economy, this case study focuses on the key role of HM Treasury in implementing Government economic policies.It focuses on:

  1. How the Government deals with macroeconomic issues such as economic growth, employment and inflation. These issues are about the economy as a whole.
  2. How the Government deals with microeconomic issues such as the performance of businesses and their products within markets across the UK.  

This also has a bearing on the productivity of this economy as a whole, and Britain’s competitiveness abroad. Managing the economy involves both macro and micro economic policy.

Economic events impact daily upon the lives of individuals and business organisations. We have only to pick up a newspaper or listen to the radio to hear about changes in living standards, or job opportunities for people who either want employment or wish to change from one job to another. Some stories might focus on changes in productivity, or prices of certain products such as cars, or even prices as a whole.

Others may refer to changes in the exchange rate, or new initiatives that have been undertaken to improve the environment in which we live. And, of course, public spending is always newsworthy, as is anything that has an effect on standards that are important to us, such as those in education, health and social welfare or safety within our society.

The economy

Business organisations are particularly affected by events within the economy. It is therefore important for the Government to create the stable macroeconomic environment that encourages people in business to invest, to employ more people and create demand for their products. In contrast when business people are uncertain about the future they are wary about investing and taking on new workers. The Government, through its microeconomic policies, is also encouraging businesses to increase productivity – that is to improve the amount of economic output they create from each worker and each pound of investment.

The economy comprises of many millions of households and businesses, as well as central and local government departments. The private sector is the part of the economy owned by private citizens, while the public sector is the part of the economy that is government owned and controlled. The UK is a mixed economy in which the private sector and the government work together in making decisions and solving economic problems. These decisions determine the total spending within the economy, as well as its total income and level of goods and services.

Hm Treasury 5 Diagram 1There is a link between producers and consumers in the economy. One way of looking at this is as a simple circular flow. For example, an imaginary household may receive all of its income in a month in the form of wages. If that household was to spend all of its income on consumer goods, there would be a flow of income from the producer or firm paying the wages back to the organisations through the mechanism known as the market.

The market

The market is the vital link between producers and consumers of goods and services. In some instances, producers and consumers may meet physically, such as at a local fruit stall in a market, but in most instances business is transacted through some form of intermediary such as a retail organisation.  

The market is, therefore, the process by which decisions consumers make about the goods available to them and producers make about what to produce, are reconciled by the adjustment of prices.  Prices of goods and of resources, such as wages for labour, ensure resources are used to produce the goods and services that society demands.

HM Treasury | Steering the economy