MACRO-ECONOMICS NOTES
All economic transactions added = economy
Macroeconomics Objectives (what does the gov try to achieve?)
1. Sustainable /trend economic growth (growth of REAL GDP – national
output 2/2.5%)
due to increase in aggregate demand (total spending in the
economy, usually
measured annually) respond by producing more
? – to boost material standard of living
more production = more consumption (economic growth rate must
> pop growth
rate)
2. Low stable inflation – Bank of England target at 2%,
why 2% not 0%? It’s not technically feasible and get it to 0% from
2% is very difficult, the paying to get to 0% is not worth it
average price level = total of all prices in the economy/number of
prices
caused by:
i. too much aggregate demand
ii. already operating at full capacity cannot respond by
producing more
iii. instead respond by raising prices = inflation
? – inflation reduce purchasing power of money and damaging to
workers not able
to negotiate themselves to pay
3. Low unemployment (4-5%), rising employment
rate expressed as % of workforce (16-65 years old,
in/available/actively seeking
work)
caused by lack of aggregate demand
low spending levels low production levels workers no longer
needed
? – to boost material standard of living, use less gov. benefit, more
tax income, less health issues/crimes
4. Satisfactory balance of payments – avoid large deficit on current
account (exports & imports)
= currency flows in and out of economy created by foreign trade
investment
caused by:
i. poor British international competitiveness i.e. not high
enough quality goods
plentiful supply of cheap credit i.e. use debt to fulfil spending more
than income
? – importing most goods we consume limits jobs available
5. Balance government (fiscal budget) Low gov borrowing (deficit of less
than 3%, national debt of less than 60%)
tax collected finance government spending
, fiscal deficit: planned tax income < planned gov. expenditure
caused by:
i. recessions as unemployment rises
ii. politicians increase their chance in election promise lower
tax
fiscal surplus: planned tax income > planned gov. expenditure
? – in fiscal deficit year after year debt will grow
tax will then have to be spent on debt interest and less on public
service
balanced: PSNCR 0 and national debt/AS will not change
6. Protection of the environment: minimise pollution and damage to the
eco-system
? – gain utility from consuming environmental goods non-material
standard of living
need to promote intergenerational equity + conserve finite
resources to not affect future gen.
how:
i. higher tax in activities that create pollution
ii. subsidise non-polluting alternatives
7. Greater income equality
differences in income due to differences in qualifications, inherited
wealth. etc.
gov. tries to narrow the gap between rich and poor
? – lower levels of crime + greater social cohesion within countries
improve non-material standard of living
how: tax rich heavily finance public services
8. Stable exchange rate – avoid destabilising
devaluations/appreciations
If value of X>M surplus - China, Japan have trade surplus
If M>X deficit
There is always going to be a conflict between one and the other, the gov.
cannot achieve everything at once
e.g. boost economic growth drive inflation rate up, balance of payment
CIRCULAR FLOW OF INCOME
Circular Flow of income: diagram shows how money circulates around the
economy from
households to firms and back again
Injections (GIX)
(G) – Government
Spending
(I) – Investment
(X) – Exports
Withdrawals/leakages
(SMT)
, (S) – Savings
(M) – Imports
(T) – Taxation
Some of our income paid to the government in the form of tax
withdrawal leakage
Gov. spend this money e.g. NHS, defence Injection
Consumers don’t spend all their money, put aside for future spending, i.e.
savings (S) in banks accounts and other types of deposit (not passed
onto firms);
Banks lend money for consumption or investment (injection) e.g. on
new technology
Spent on foreign-made goods and services which flow into the economy
i.e. imports (M)
Overseas consumers buying UK goods and service, i.e. UK export
expenditure (X)
When the level of injections = the level of withdrawals, the system is in balance.
When the level of injections (GIX) > level of withdrawals (SMT), then the national
income will rise.
When the level of injections (GIX) < level of withdrawals (SMT), then the national
income will fall.
Circular flow = Keynesian economic model
Level of AD determines level of national output + employment
Total amount of money in circular flow level of AD
The circular flow + Great Depression of 1930s
- at the start of decade classical school dominated economic thinking
believed economy was self-regulating
recessions + high unemployment would disappear automatically
- Keynesians disagree market X self-regulating (more below)
Economy can come into equilibrium at any level of output + employment
Economy suffered a decade of stable but low GDP due to stable volume of
money in circular flow trapped in low output equilibrium
Laissez Faire policy of classical school ensured depression continued
GDP, GNP, REAL VS NOMINAL
Measuring national income
GDP = Gross Domestic Product ($2.7 trillion in UK)
o total value of final goods and services produced in a country in a
one year period
, o GDP includes the output of foreign owned businesses that are
located in a nation following foreign direct investment. E.g. the
output produced at the Nissan car plant on Tyne and
Wear contributes to the UK’s GDP.
o GDP per capita = total GDP/total population
Measured in:
1) volume terms: quantity of the nation’s output in unit terms
2) value terms: quantity of nation’s output in money terms
NI can rise if:
economy has produced a greater volume of goods and services
increase in average/ general price level = inflation
Use of national income statistic
- Make comparisons over time + between countries + make conclusion
about standard of living
- Used by policymakers to forecast changes in economy, formulate
economic policy
3 methods of measuring an economy’s output (GDP)
1. Expenditure - add all expenditures spent on g/s produced domestically (C
+ I + G + (X-M) aggregate demand)
2. Factor Income - measures sum of the incomes earned through the
production of g/s (wage, profits, rent income, interest)
3. Value of Output – measures the value added (retail price – value of
intermediate goods like cost of materials) from each of the main economic
sectors (e.g. Primary, secondary, tertiary, quaternary).
In theory, these should sum to the same amount: total output of all
firms = total income = expenditure = GDP
BUT *Every country has unrecorded activity
GNP = Gross National Product (aka GNI – Gross national income)
o Total value of output produced by resident (UK owned businesses
both at home and abroad)
o = GDP + net property income from abroad (NPIA).
NPIA = external income earned by residents – domestic
income earned by non-residents
o Philippines has a good GDP but poor GNP, as the majority of its
companies send their earnings abroad to their HQ’s.
o Remittance incomes are where people work in one country, and
send most of their income back to their family overseas. hugely
important in low, middle income countries – GNI rise
o Strong foreign aid inflows will also lift GNI e.g. East Timor’s GNP is
more than 3 times the value of their annual GDP
The volatility (instability) of currencies is a problem with using market
exchange rates to measure GDP.
