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Edexel macroeconomics notes (theme 2)
- Module
- Macroeconomics - Theme 2 + 3
- Institution
- PEARSON (PEARSON)
Edexel macroeconomics notes (theme 2)
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Macroeconomics:Macroeconomics = Branch of economics which studies the behaviour and performance of
an economy as a whole. It focuses on changes in the economy such as unemployment, GDP
and inflation
Economics:
Social science
How people live and interact
Subjective so no fixed rules and patterns.
Main economic problem: What do we use our resources for?
1. What to produce
2. Who to produce if for?
3. How to produce it
4. Scarcity – Limited resources + unlimited wants
Employ efficiently – FACTORS OF PRODUCTION
1. C – Capital – machinery + buildings
2. E- Enterprise – skills of workers, owners, entrepreneurs
3. L – Land – property, what its built of
4. L - Labour – employees + lending workforce
Economic statements:
This can either be positive or normative.
Positive
Can be proven
Empirically factual
Based on tested data
Example – Rising wages by 10% will reduce poverty by 20%. This can be tested and be
factually proven
Normative:
Subjective
Opinion based
Not factual
Involves words such as ‘fair’ and ‘should’ and ‘might’
Example – A rise of tax is unfair on the poor; it might lead to more poverty and shouldn’t be
done.
, Economic Growth:
Short run = The actual annual percentage change in real national output.
National output measured in GDP
REAL national output is the GDP without taking inflation into account
Long run = An increase in the potential productive capacity of the economy
Measuring economic growth using GDP:
Economic growth = Increase in real GDP
GDP = Total G+S produced in a year, or spent/earned
Potential EG = measure of increase in productive capacity of an economy – show by
outwards movement on PPF
A recession occurs when an economy suffers two consecutive quarters of negative
EG – caused by less spending, income and output – results in unemployment +
decreased living standards
Nominal and real value:
Nominal value is money value of G+S by country in 1 year
Real value taken inflation into account
Real national output = nominal national output / average price level
Short run economic growth is measured by annual change in real national output,
real national income or real GDP
GDP vs GNI:
GNI = Measure of income received by a country domestically (GDP) and via net
incomes from overseas
GNI = GDP + profits from people and companies abroad – profits from people and
companies from abroad that leave the economy and go abroad.
Purchasing power parties (PPP)
Used to compare GDP in different countries + takes into account basket of goods of
each country.
PPP exchange rate = rate that equalises purchasing power of different countries by
eliminating price differences
,Limitations of GDP for living standards
Two countries may have the same GDP but different living standards – reasons:
Different populations – for per capita
Different rates of inflation – real GDP comparison
Difference in exchange rate
Difference in income distribution
National happiness used instead of GDP for living standards:
, Macro-Economic Equilibrium
Aggregate Demand
AD = C + I + G + (X – M)
C= consumption of g+s of firms in economy *Households*
I = Investments (firms buying capital goods from other firms) *Firms*
G = Gov spending * Government*
X-M = Net trade of exports – imports,
Net trade is how much firms export to other countries in relation to the consumption
of households.
J = W – injections = withdrawals (equilibrium)
G = T – balanced budget
G= gov spending
T= taxes
X = M = Exports = imports
G > T – budget deficit (need to borrow money)
G < T = budget surplus
X = M – Exchange rate (price of pound in relation to other)
S- strong
P-pound
I- imports
C- cheaper
E-exports
E -expensive
Equilibrium is when:
I = S – borrowing = saving
G=T
X=M
J=W
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