Abbie Leaver
Macroeconomics
Examines the performance, structure, behavior and decision-making in an economy as a
whole.
Macroeconomic health and stability are vitally important to the standard of living and
wellbeing of citizens.
In a modern society, improving the overall level of economic performance is perhaps the
single most important role of government.
Economic variables are therefore avidly measured and compared, and economic performance
is key in deciding elections.
Macroeconomic indicators
▪ GDP - the total level of output in an economy
Want steady growth (2-3% per year).
▪ Unemployment - the number of people unable to find work in an economy
Want low unemployment (but some so there is competitive tension and still people
in the pool of unemployment). 4.7% - 5.8% ideal.
▪ Inflation - the rate of change of prices in an economy (purchasing power in the
economy)
Some means that people are encouraged to spend, it also indicated increasing GDP.
2% ideal.
▪ Balance of trade - the balance between imports and exports in an economy
Balance/small surplus is best. Too much deficit means government loses money.
High surplus means that international relations break down as other countries suffer at
your gain.
▪ Budget position - the balance between government spending and government income
in an economy
Balance/ small surplus or deficit is desirable. Small deficit is not necessarily bad,
small surplus is good but anything over a certain level will seem that the government
isn't spending enough on the population when they could.
UK: -3.6% of GDP (2017)
US: -3.4% of GDP (2017)
Norway: 4.2% of GDP (2017)
Syria: -8.7% of GDP (2017)
Venezuela: -38.1% of GDP (2017)
,Abbie Leaver
How do governments affect the macro-economy?
Macro-economic means we are looking at policies that affect GDP, interest rates etc.
• Monetary policy: changes in interest rates and money supply (quantitative easing)
• Fiscal policy: changes in government spending and taxation
[Both monetary and fiscal act on demand within the economy]
• Supply-side policy: policy aimed at improving the quantity/quality of factors of
production (e.g. investment in infrastructure, education/training, de-regulation)
Correlation of factors
GDP and unemployment:
▪ Usually GDP reduction causes an unemployment rise
▪ The UK has seen recessions in the 1970s, 1990 and 2008, all leading to unemployment
rates rising, sometimes as high as 12% (1982)
GDP and inflation:
▪ High inflation causes a downturn in economic growth and recession
o High inflation of 17% in 1980 -> Recession starting 1981/2
o Low inflation of 5% in 1984-6 -> Boom in 1988
o High inflation of 8% in 1990 -> Recession starting 1991
▪ High inflation – currency worth less – imports are more expensive – GDP decreases
GDP and trade balance:
▪ High economic activity = more imports in the UK
o High GDP growth in 1988 = increased imports meaning higher deficit of -4%
GDP and government spending:
▪ Recessions lead to government deficit
o 1974 recession = deficit of -6%
o 1988 boom= surplus of 1% in 1989
o 1990 recession = deficit of -7%
o 2007 recession = deficit of -10%
▪ Because: less (income /corporation and VAT) tax revenue, government spend more
trying to keep the economy moving (e.g. subsidizing businesses)
Homework
1. Rewrite.
2. Many economies seemed to suffer in the third quarter. German economy fell by
0.2% between June and September, Japan’s GDP dropped by 0.3% and the eurozone
growth rate was the lowest since 2014 at 0.2%.
3. The uncertainty of the global economy has been shown by the inconsistent prices.
Global stock prices fell, reducing the MSCI world index by 9%. Oil prices fell from 86
to 66 USD per barrel in just over a month. These price drops are signals for drops in
economic confidence.
,Abbie Leaver
4. The author is referring to the anomalous circumstances that could have lead to
individual economies falling in speed, for example, the new regulations making
Germany’s key industry in automobiles suffer.
5. Monetary policy includes adjusting interest rates at the world bank and quantitative
easing (printing more money). This effects how money moves around the economy,
and the quantity that moves.
6. Other factors that could be responsible are the trade tensions created by the US this
year, the other factor affecting Europe’s economy could be the dispute between the
EC and Rome, over Italy’s fiscal policy.
7. The tone of the article is speculative and negative, suggesting that the world
economy is suffering for a multitude of reasons and may continue to suffer
dependent on which factor holds the most weight. Economists are cautious as they
have no conclusive proof of what is causing the economic downturn and can
therefore, not predict how the global economy will continue.
Business cycle diagram
, Abbie Leaver
Intro to Macro: Worksheet
Macro variable: Policy objective (what does the government want?)
GDP High with steady growth of 2-3% a year.
Inflation Some inflation so people are encouraged to spend. 2% per year ideal.
Budget position Relatively balanced with a small surplus or deficit. Ideal around +/- 1-
2%.
Trade balance Balance or a small surplus is best so that export revenues are increased,
too high can create international tension whilst deficit means the
country is unsustainable.
Unemployment Low unemployment but still present. This means there is competition so
that people are eager to acquire skills. Also keeps inflation low.
(10 marks)
Explain each of the following (3 marks each):
Why is GDP growth such an important goal for the UK government?
GDP growth is important because it shows the economy is expanding and economic activity
is high. GDP growth also indicates low unemployment meaning less is spent on
unemployment benefit and the public are happier. Furthermore, GDP growth means higher
tax revenues that can be spent on supply side policy, such as, investing in infrastructure or
fiscal policy such as spending on healthcare.
How does high inflation impact the economy (consider impact on consumers and firms)?
High inflation means that firms raise their prices in order to make the same amount of profit
in real terms, their production costs are higher and consumers have more money, therefore,
they raise prices.
Consumers often have higher wages, meaning they have more disposable income in absolute
terms; however, goods then become more expensive meaning their disposable income in real
terms is the same.
The relationship between economic growth and unemployment?
Economic growth is often caused a diversified economy with many businesses, this means
that there are many jobs available for a variety of skills. Therefore, economic growth often
indicates that there is low unemployment.
Why might the current account deficit become smaller during an economic slowdown?
If a recession occurs then the government may begin austerity, this means they reduce
government spending. This reduces the money out of the government and therefore, the
budget becomes more balanced.
How do government finances vary over the economic cycle (contrast periods of GDP growth
and periods of recession)?
Government finances increase in times of economic boom as tax revenues are high. They are
low in times of economic recession as people cannot pay tax, and more government spending
must occur to kickstart the economy; however, the government can also retract spending in
recession if they choose to follow the austerity route. Government spending can also be high
in times of economic boom as they spend on supply side policy to increase the production
possibilities of the economy.
Analysing data (3 marks each):
