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Summary A level Macroeconomics revision notes
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AQA Specification The difference between saving and investment. Students will only be required to calculate the multiplier from themarginal propensity to consume. Calculations from the marginal propensities to withdraw will not be expected
National income data
Short turn supply
The use and limitations of national income data to assess changes in living standards over time.
The use and limitations of national income data to compare differences in living standards between The price level and production costs are the main determinants of the short-run AS.
countries. Changes in costs, such as: money wage rates, raw material prices, business taxation and productivity, will
The importance of using purchasing power parity (PPP) exchange rates when making international shift the short-run AS curve.
comparisons of living standards.
Determinants of long run supply
The circular flow of income
The fundamental determinants of long-run AS such as technology, productivity, attitudes, enterprise,
factor mobility, and economic incentives.
What national income measures.
The position of the vertical long-run AS curve represents the normal capacity level of output of the
The difference between nominal and real income. economy.
Real national income as an indicator of economic performance. The importance of the institutional structure of the economy in determining aggregate supply, such as the
The circular flow of income concept, the equation income = output = expenditure, and of the concepts of role of the banking system in providing business investment funds, should also be understood.
equilibrium and full employment income. The Keynesian AS curve.
The difference between injections and withdrawals into the circular flow of income.
The effect of changes in injections and withdrawals on national income.
Economic growth and the economic cycle
Aggregate demand and supply analysis The difference between short-run and long-run growth.
The various demand-side and supply-side determinants of short-run growth of real national income and
the long-run trend rate of economic growth.
The costs and benefits of economic growth.
Changes in the price level are represented by movements along the aggregate demand (AD) and
The impact of growth on individuals, the economy and the environment.
aggregate supply (AS) curves.
The various factors that shift the AD curve and the short-run AS curve.
The concept of the economic cycle and the use of a range of economic indicators, such as real GDP, the
rate of inflation, unemployment and investment, to identify the various phases of the economic cycle.
The factors which affect long-run AS and distinguish them from those which affect short-run AS.
The difference between positive and negative output gaps.
Underlying economic growth is represented by a rightward shift in the long-run AS curve.
The causes of changes in the various phases of the economic cycle, including both global and domestic
How to use AD/AS diagrams to illustrate macroeconomic equilibrium. demand-side and supply-side shocks.
Students should be able to use a production possibility curve and AD/AS diagrams to illustrate the
distinction between short-run and long-run economic growth.
Determinants of aggregate demand Students should understand that long-run economic growth occurs when the productive capacity of
the economy is increasing and is a term used to refer to the trend rate of growth of real
national output in an economy over time.
What is meant by AD. Students should be able to discuss the sustainability of economic growth.
The determinants of AD, ie the determinants of consumption, investment, government spending, exports Students should understand that a positive output gap occurs when real GDP is above the
and imports. productive potential of the economy, and a negative output gap occurs when real GDP is
below the economy’s productive potential.
The basic accelerator process.
Students should be able to discuss causes of cyclical instability such as: excessive growth in credit and
The determinants of savings levels of debt, asset price bubbles, destabilising speculation and animal spirits or herding.
Aggregate demand and economic activity
The role of AD in influencing the level of economic activity. Employment and unemployment
The multiplier process and an explanation of why an initial change in expenditure may lead to a larger
impact on local or national income.
The concept of the marginal propensity to consume and use the marginal propensity to consume to
The main UK measures of unemployment, ie the claimant count and the Labour Force Survey measure.
calculate the size of the multiplier. The concepts of voluntary and involuntary unemployment.
Why the size of the marginal propensity to consume determines the magnitude of the multiplier effect. The terms seasonal, frictional, structural and cyclical unemployment.
, How employment and unemployment may be determined by both demand-side and supply-side factors. The factors considered by the MPC when setting the bank rate.
The concept of, and the factors which determine, real wage unemployment. How changes in the exchange rate affect aggregate demand and the various macroeconomic policy
The concept of, and the factors which determine, the natural rate of unemployment. objectives.
The consequences of unemployment for individuals and for the performance of the economy. The monetary policy transmission mechanism, including the relationship between changes in interest
rates and the exchange rate.
Students should appreciate that unemployment has a variety of causes and hence the appropriate policies
to reduce unemployment depend on the cause.
They should understand that a negative output gap is linked to cyclical unemployment and that supply- How the Bank of England can influence the growth of the money supply.Students should understand current and recent
side causes of unemployment affect the position of the long-run aggregate supply curve instruments of monetary policy such as: quantitative easing, Funding for Lending and forward guidance.
Students should understand how the MPC of the Bank of England uses changes in bank rate to try to achieve the
objectives for monetary policy, including the government’s target rate of inflation.
Inflation and deflation
Quantitative easing in Covid
The concepts of inflation, deflation and disinflation.
Demand-pull and cost-push influences on the price level. Fiscal policy
Fisher’s equation of exchange MV = PQ and the Quantity Theory of Money in relation to the monetarist
model.
The effects of expectations on changes in the price level
Fiscal policy involves the manipulation of government spending, taxation and the budget balance.
The consequences of inflation for both individuals and the performance of the economy.
The consequences of deflation for both individuals and the performance of the economy. Fiscal policy can have both macroeconomic and microeconomic functions.
How changes in world commodity prices affect domestic inflation. How fiscal policy can be used to influence aggregate demand.
How fiscal policy can be used to influence aggregate supply.
How changes in other economies can affect inflation in the UK. Students should understand that deflation exists when
How government spending and taxation can affect the pattern of economic activity.
the price level is falling, whereas disinflation is when the rate of inflation is falling.Students should appreciate that The types of and reasons for public expenditure.
deflationary policies are policies to reduce aggregate demand and do not necessarily result in deflation.Students can
use T instead of Q in the Fisher equation but using Q means that PQ is nominal national income and overcomes the
Why governments levy taxes.
difficulties associated with the inclusion of intermediate transactions The difference between direct and indirect taxes.
The difference between progressive, proportional and regressive taxes.
Objective conflicts
The principles of taxation, such as that taxes should be equitable.
The role and relative merits of different UK taxes.
The relationship between the budget balance and the national debt.
How negative and positive output gaps relate to unemployment and inflationary pressures. Cyclical and structural budget deficits and surpluses.
Both the short-run Phillips curve and the long-run, L-shaped Phillips curve. The consequences of budget deficits and surpluses for macroeconomic performance.
The implications of the short-run Phillips curve and the long-run, L-shaped Phillips curve for economic The significance of the size of the national debt.
policy.
How economic policies may be used to try to reconcile possible policy conflicts both in the short run and
The role of the Office for Budget Responsibility.
the long run.
Students should be able to use macroeconomic models, including the AD/AS model, to analyse the causes
of possible conflicts between policy objectives in the short run and long run. They should be able to
discuss approaches to reconciling these conflicts and the monetarist/supply-side view that the major
macroeconomic objectives are compatible in the long run.
The L-shaped Phillips curve is also known as the vertical long-run Phillips curve
Central banks and monetary policy Supply side policies
The main functions of a central bank. The difference between supply-side policies and supply-side improvements in the economy.
That monetary policy involves the central bank taking action to influence interest rates, the supply of How supply-side policies can help to achieve supply-side improvements in the economy.
money and credit and the exchange rate. How supply-side policies, such as tax changes designed to change personal incentives, may increase the
The current objectives of monetary policy set by the government. potential output of the economy and improve the underlying trend rate of economic growth.
The role of the Monetary Policy Committee of the Bank of England (MPC) and how it uses changes in bank How supply-side policies can affect unemployment, the rate of change of prices and UK external
rate to try to achieve the objectives for monetary policy, including the government’s target rate of performance, as reflected in the balance of payments on current account.
inflation. The role of supply-side policies in reducing the natural rate of unemployment.
, Free market supply-side policies include measures such as: tax cuts, privatisation, deregulation and some Expenditure-switching and expenditure-reducing policies.
labour market reforms. The effect policies used to correct a deficit or surplus may have upon other macroeconomic policy
Interventionist supply-side policies include measures such as: government spending on education and objectives.
training, industrial policy, subsidising spending on research and development. The significance of deficits and surpluses for an individual economy.
Supply-side policies can have microeconomic as well as macroeconomic effects The implications for the global economy of a major economy or economies with imbalances deciding to
take corrective action.
Students should recognise that supply-side changes in the economy often originate in the private sector,
Students should appreciate the difference between foreign direct investment (FDI) and portfolio
investment
independently of government, eg through productivity improvements, innovation and investment.
Students should recognise that supply-side policies can involve government intervention to deal with
market failures such as short-termism, as well as policies to improve economic incentives and the Exchange rate systems
operation of market
Globalisation
How exchange rates are determined in freely floating exchange rate systems.
How governments can intervene to influence the exchange rate.
The advantages and disadvantages of fixed and floating exchange rate systems.
The causes of globalisation. Advantages and disadvantages for a country of joining a currency union, eg the eurozone.
The main characteristics of globalisation.
The consequences of globalisation for less-developed and for more-developed countries.
Economic growth and development
The role of multinational corporations in globalisation
Trade
The difference between growth and development.
The main characteristics of less-developed economies.
The main indicators of development, including the Human Development Index (HDI).
The model of comparative advantage. Factors that affect growth and development, such as: investment, education and training.
The distinction between comparative and absolute advantage. Barriers to growth and development, such as: corruption, institutional factors, poor infrastructure,
The model shows that specialisation and trade can increase total output. inadequate human capital, lack of property rights.
Other economic benefits of trade, such as the ability to exploit economies of scale and increased Policies that might be adopted to promote economic growth and development.
competition. The role of aid and trade in promoting growth and development.
The costs of international trade.
The reasons for changes in the pattern of trade between the UK and the rest of the world.
The nature of protectionist policies, such as: tariffs, quotas and export subsidies.
Students should appreciate the links between this and other parts of the specification, such as:
globalisation, trade, the determinants of economic growth and inequality.
The causes and consequences of countries adopting protectionist policies. Students should be able to compare market-based strategies and interventionist strategies for promoting
The main features of a customs union. growth and development.
The main characteristics of the Single European Market (SEM).
The consequences for the UK of its membership of the European Union (EU).
The role of the World Trade Organisation (WTO).
Students should be able to use a simple numerical example to illustrate the principle of comparative
advantage and the associated benefits of trade.
Students should be able to use a diagram to illustrate the effects of imposing a tariff on imports.
Balance of payments
The difference between the current, capital and financial accounts on the balance of payments.
The current account comprises trade in goods, trade in services, income flows and transfers.
The meaning of a deficit and a surplus on the current account.
The factors that influence a country’s current account balance such as productivity, inflation and the
exchange rate.
The consequences of investment flows between countries.
The policies that might be used to correct a balance of payments deficit or surplus.
, National income data
Limitations of income data:
1. GDP doesn’t indicate how income is distributed = inaccurate representation of living
standards EG. Qatar is high (oil reserves) but inequality
2. Must be calculated using PPP purchasing power so can account for international price
differences
3. Hidden economies / informal are not accounted for (Colombia 62.1% informally
employed) = misleading comparisons
4. Doesn’t indicate welfare like happiness index
Better indicator:
GNI – measures the final value of incomes flowing to the UK owned factors of production whether
they are in UK or overseas GDP + net property income from overseas (interests from savings,
profits from overseas companies, from oversea assets)
Eg. Hong Kong GNI bigger than their GDP, because net inflow from overseas investment
Eg. Country with many foreign businesses operating GNI is smaller than GDP bc profits are leaked
to country of origin
Worse: (US replaced GNP with GDP in 1991)
GNP – gross national product – value of all finished goods and services produced only by
country’s citizens both domestically and abroad over a period of time
Circular flow of income
A model which demonstrates
the flow of money between
households and firms.
Firms: companies who pay
wages to workers to produce
output
Households: individuals who
consumer goods and receive
wages from firms
Injections and leakages:
Government: can spend
(injection) and tax (leakage)
Overseas: Exports (injection)
imports (leakage)
Savings (leakage)
Investment (injection)
In equilibrium:
Total Injections (I + G + X) = Total Withdrawals
(S + T + M)
If injections are greater than withdrawals, Y will
increase. As Y increases, S, T & M will also increase, as
households will save more, pay more tax and buy more
goods from abroad. Y will continue to rise until
injections and withdrawals are equal.
,if withdrawals are greater than injections, Y will fall. As Y falls, withdrawals will fall until injections
and withdrawals are equal.
National income = national output = national expenditure
3 ways of measuring new output in an economy:
1. Income approach – total income to factors of production
2. Output approach – adds up the value added by each of the
industries to the economy
3. Expenditure approach – consumption + investment + gov
spending + (exports – imports)
The multiplier:
multiplier = change in national income / initial
change in gov spending
size of the multiplier = 1/ 1- MPC = 1/ MPS
MPC – marginal propensity to consumer = the
proportion of any extra income that I spent on
consumption (eg. If MPC is 0.8 for every £1 they
earn they spend 80p)
MPS – marginal propensity to save = proportion of
any extra income that is saved (if MPS = 0.2 then
out of every £1 earned 20p is saved)
Determinates of savings:
Interest rates – higher interest rates make saving more attractive.
Rising income enables higher savings. People on very low incomes cannot afford
the luxury of saving
Economic growth – high growth and high consumer confidence encourage
relatively higher spending and a fall in the savings ratio.
The age of individuals – People in their 40s and 50s tend to save for retirement. Old
people run savings down.
Cultural trends – some cultures have a stronger ‘saving culture’ – others pursue
higher spending and borrowing.
, Wealth – Rising house prices increase household wealth and diminish the need to
save in other forms.
Inflation – high inflation may discourage cash saving, but encourage the purchase
of fixed assets.
Keynesian LRAS
LRAS
The potential output an economy is based o its current factors of production. If these factors
increase / improve there will be an increase in LRAS
Shifters:
- Technological improvements
- Increased factor mobility
- Productivity improvements
- Increased entrepreneurship
- Increases in capital stock of economy (more ppl having shares in companies)
- Gov policies targeting supply side
Explain why the institutional structure of the economy adds to its productive potential (shifts LRAS)
1. Institutional structure refers to the aspects of an economy such as the legal structure and
the financial structure, they affect economic transactions through policy making
2. A functioning legal sector makes it more likely that contracts between agents will be
enforced, this reduces the risk involved in transactions and increases business confidence
thus increasing business activity
3. A functioning financial sector makes it easier to transfer funds between those w surpluses
(savers) to shoe requiring funds (borrowers). This makes it more likely that a business
looking to set up or expand will be able to borrow, increasing the productive capacity of the
economy.
Classical view: economic growth influence by long term factors like increases in productivity
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