AQA (but can be used for any exam board) AS/A-Level Macro Economics
Perfect for AS/A-Level students and university students for an introduction to macroeconomics who have not studied economics before.
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Macro-Economic Objectives (used to assess the performance of the economy):
1. Achieve economic growth
2. Maintain a low level of unemployment
3. Maintain price stability (inflation)
4. Manage a balance of payments in the current account
Short Run Economic Growth Long Run Economic Growth (/economic growth)
Growth of real output resulting from using idle An increase in the economy’s productive potential
resources/spare capacity, e.g. labour of real output.
AO2: Annual UK growth rate from 1956-2016 has
been 2.46% per year.
Why is economic growth important?
1. Shows whether economies are capable of meeting consumers' needs and wants – greater satisfied
demand
2. Growth stimulates more jobs (help new people enter labour marker and receive an income)
3. Increased income per head of population (due to increase in employment) leads to a higher standard
of living and high economic welfare
Inflation:
Inflation: A persistent increase in the level of prices overtime (‘basket’ for G/S)
Consumer Price Index (CPI): Official measure of inflation in UK-compares the general level of prices of a basket
of goods and services in an economy with the same month last year.
AO2: Current rate of inflation in UK in Dec. 2018 is 2.1%.
Measuring economic growth:
-Change in the level of national output (total goods and services produced) of an economy overtime
Income=Output=Expenditure
GDP: Sum of the value of all goods and services produced in an economy in a period of time (gov. spending is
excluded)
A02: Currently 510 million; UK annual GDP target is 2.5%.
A04: Adjustment to GDP: GDP measures the monetary value of G/S therefore the price of these G/S influences
the measure of GDP. If prices rise but physical output does not increase, the monetary GDP figure is
misleading. We therefore need to adjust for these price rises for a more accurate measure of economic
growth.
,Adjustment to GDP:
Monetary GDP Real GDP
Total value of goods and services produced in an Total value of all goods and services produced in an
economy NOT ADJUSTED for inflation. economy ADJUSTED for inflation (takes account of
AKA. GDP at “current prices” changes in price levels of an economy).
AKA. GDP at “constant prices”
=Nominal GDF (P*Q)-Inflation Rate (%)
-Gives a truer representation; since inflation is taken
into account, the growth is not as a result of price
increases but expanding production capacity.
GDP per capita: Measure of living standards of a country
National average output per person
Average spending power per person.
= Real GDP / Population
Why is it used?
Allows more useful comparison between countries.
Eliminates population issue
How is economic growth analyzed?
Trend Growth Rate Actual Growth Rate
Average performance of the economy overtime (LT) Performance of the economy at a particular point in
Linear line time
Rate at which output can grow on a sustained Non-linear line (pattern of peaks and
basis troughs)
AO2: UK target trend growth rate = 2.5% annually Actual growth rate, AKA. Economic Cycle
Economic Cycle: Recurring upswings and
downswings in economic activity over 4-12
year cycle
Economic Cycle Phases:
Economic Phase Description Economic Indicators
Recovery An upturn in economic growth Rising inflation
Actual growth>trend growth Rising economic growth
Falling unemployment
Boom Long periods of high economic growth rates High inflation
High economic growth
Low unemployment
Recession A fall in real GDP (negative economic growth) Falling inflation
for 2 consecutive quarters Falling growth rates
Actual growth<trend growth Rising unemployment
Depression A long recession (negative economic growth) Low inflation
lasting many quarters Negative economic growth
High unemployment
,Economic Growth Output Gaps:
Negative Output Gap:
Negative Output Gap: The level of actual real output in the economy is lower than the trend output level
Actual Growth < Trend Growth
Features of Negative Output Gap:
1. High unemployment
2. Low economic growth rates
3. Low inflation
Positive Output Gap:
Positive Output Gap: The level of actual real output in the economy is greater than the trend output level
Actual growth > Trend Growth
Features of a Positive Output Gap:
1. Low unemployment
2. High economic growth rates
3. High inflation
AO2: Currently UK economy is producing less than its trend level / negative output gap and has still not
returned to pre-crisis trend level
2). Circular Flow of Income – 2 Sector Model:
, -There are 2 main macro-economic models to explain macro equilibriums and economic growth:
1. Circular Flow of Income Model:
Circular Flow of Income Model: Shows the flow of income and spending around the economy between
households and firms. The model identifies that income will be greater than the stock of money within
an economy if the stock is used in more than 1 exchange. Will continue as long as households keep
spending what they earn and firms keep using their revenues to produce more goods (and national
output won’t change).
Flow: Flow concept of money e.g. income coming into and out of the economy, measured overtime.
Stock: Value of a stock of assets at a particular point in time.
An economy is made up of firms and households.
Households provide the FoP
Firms use FoP to produce goods and services (make up the national output) and sell the G/S.
Households sell their labour to firms and receive income.
Households purchase the G/S from firms using their income- value of this spending is called national
expenditure.
Circular Flow of Income:
Flows
1). Physical Flow: (Shown by straight arrows) ‘real things’ - I.e. goods, services, labour, land, capital
2). Monetary Flow: (Shown by curved arrows) - I.e. the money that pays for your physical things’
National Output (GDP): The flow of new output produced by the economy in a particular period e.g. a year.
GDP = Real National Output = Real National Income = Real National Expenditure
National Income: Total income received in an economy from selling goods and services.
National Expenditure: Ability to spend on goods and services using national income.
National Output:
In order to produce national output, an economy must possess FOP and a stock of physical capital goods.
National Capital Stock: Stock of capital an economy possesses at a point in time and accumulates over a period
of time, e.g. machinery, buildings.
National capital stock is a part of the stock of national wealth.
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