Economics Macroeconomics
Topic 1:
Macro – Considers the TOTAL quantity of goods and services produced by all firms
in economy.
Aggregate Demand (AD) – The total demand, total spending, in an economy at a
given price level over a given period of time. AD = C + I + G + (X – M)
Aggregate Supply (AS) – The total amount of goods and services which can be
supplied in an economy at a given price level over a given period of time.
Government Policy Objectives:
1) Achieve economic growth and improve living standards. 2) Maintain full
employment/minimising unemployment.
3) Maintain price stability (low and stable inflation)
4) Stable balance of payments (BoP) on current account
These are macroeconomic indicators that are used to assess the performance of an
economy.
Importance of Economic Growth:
1) Economies need to be capable in meeting consumer’s infinite demands and
achieve maximum economic welfare.
2) Growth stimulates more jobs -> help new people as they enter the labour market
and receive an economy.
3) Increase satisfied demand and increases income per person (from increased
employment) -> higher standard of living (SoL) & increased economic welfare.
Short Run Economic Growth: Growth of real output resulting from using idle
resources e.g., labour (i.e., using up slack in economy).
Long Run Economic Growth – An increase in the economy’s potential level of real
output. This is caused by improved quality of FoP or increased quantity of FoP.
GDP (Gross Domestic Product): Value of all goods and services produced in an
economy in a period of time.
Economic growth is measured by looking at change in level of national output of an
economy over time (GDP). This excludes government spending, valued in GBP
Billions, measured as a % change either quarterly or annually and measures total
income generated by the UK.
Adjustment to GDP:
1) Want to increase GDO as we want to increase G/S to satisfy needs and wants.
2) BUT, GDO measures monetary values of G/S therefore price of G/S influences
measure of GDP.
3) If price increases but output doesn’t, increase in monetary GDP figure would be
misleading. Therefore, GDP needs to be adjusted for a more accurate measure of
economic growth = Real GDP.
Inflation: Sustained increase in general price levels.
Consumer Price Index (CPI) - Official measure of inflation in the UK. This
compares general price levels of a ‘basket of goods’ in an economy with the same
month last year.
,Retail Price Index (RPI) – Same as CPI but includes houses.
GDP adjusted for a truer representation of growth:
Nominal GDP – Total value of all G/S produced in an economy. This is NOT
ADJUSTED for inflation and is the GDP at ‘current prices’.
Real GDP – Total value of all G/S produced in an economy ADJUSTED for inflation
(accounts for price changes in economy) which is the GDP at ‘constant prices’.
Real GDP = Growth Rate – Inflation Rate
Real GDP gives a truer representation of growth since an increase in nominal GDP
could have resulted purely from increase in prices. Taking inflation into account ->
growth is not as a result of price increases but of expanding production capacity.
GDP per capita: GDP divided by the population. Measure of living standards of
economy/country. Shows national average output per person, average spending
power person which means that the higher the GDP per capita, the higher the living
standards.
Flawed -> Ignores unequal distribution of income and wealth.
Trend Growth Rate – Average performance of the economy over time. The rate at
which output can grow on a sustained basis. (Linear)
Actual Growth Rate – Performance of economy at a particular point in time
(economic/business cycle) -> Non-linear with a pattern of peaks and troughs.
Boom: Long periods of high economic growth rates (Actual growth > Trend Growth)
Features: Full employment, High Inflation, Economic growth > Target, High Trade
Deficit (X < M)
Recession: Negative economic growth for two consecutive quarters (Actual Growth
< Trend Growth). Features: High unemployment (cyclical), low inflation/deflation,
BoP surplus, negative economic growth so real GDP decreases.
Depression: Long Recession (negative economic growth) lasting for many quarters.
Features: Long term unemployment, deflation, long run economic growth, BoP falls
and PPF shifts in.
Recovery: Upturn in economic growth (actual growth moving towards trend growth).
Features: Decrease unemployment, increase in inflation, increase in growth & Trade
deficit as imports increase and exports decrease.
Output Gaps – Difference between trend growth and actual growth.
Positive Output Gap – When actual GDP exceeds trend GDP -> Economy is
producing greater than trend output/productive potential (outside the PPF)
Low unemployment, high inflation, exports < imports, increase economic growth.
Negative Output Gap – When actual GDP is < Trend GDP so economy Is
producing less than trade output/productive potential (inside PPF).
High Unemployment, Low inflation/deflation, exports > imports, decrease economic
growth (-ve growth).
Hysteresis – After an economic shock, the economy is left in a permanent state of
lower growth.
, Topic 2
Circular Flow of Income – Firms buy factors of production, like labour and land, from
households. In return, they pay households factor incomes, like wages and rent.
Households then spend their factor incomes on firms in exchange for the goods and
services!
Flow – Movement of any asset over a particular time period.
Stock – Build up of assets at a point in time.
Macroeconomic Equilibrium: National Output = National Income = National
Expenditure
National Output (NO) = Flow of new output produced by economy in a given time
period. Value of G/S produced in the economy – P x Q = GDP
National Income (NI) = Flow of income generated by new output in a given time
period. Total value of household income produced by the sale of national output – P
x Q = GDP
National Expenditure (NE) = Ability to spend on goods and services using national
income.
The economy must possess FoP and stock of capital goods to produce national
output. Total value of household expenditure on consuming G/S in an economy. – P
x Q = GDP. National Capital Stock – Total value of capital assets at a specific
time.
National Wealth – Stock of all goods that exist at a point in time that have value in
the economy (includes capital stock and consumer G/S)
Some national income must be spent on replacing depreciated capital to maintain
size of capital stock and ensure constant level of national output produced.
Investment – Spending on capital. Without this, national capital stock decreases
and economic growth also decreases where the PPF shifts in.
In the circular flow of income, G/S are being exchanged, stock of money
circulating/flowing around economy, stock flowing around economy earns income for
households. Households provide firms with factors of production (labour) for which
the firms give them factor incomes in return (wages). Households will then use these
factor incomes to buy goods and services from firms.
Withdrawals: Money not passed on in the circular flow of income which has the
effect of decreased NO/NI/NE. For the circular flow of income, this includes imports,
taxation and savings.
Injections: Money that originates outside the circular flow which increases
NO/NI/NE. For the circular flow of income, this includes exports, government
spending and investment.
Savings: Households save a proportion of their income where savings are income
induced (increase income = increase savings). An increase in savings decreases
expenditure which decreases the firms’ income which decreases output and
therefore national output (GDP).
Investment: Total planned spending by firms on capital goods. An increase in
capital spending, increases national capital which increases NO/NI/NE.
