A full summary of the Macroeconomics section within the IB diploma. Closely linked to the textbook and curated by many students, all of which have received a 7 in the course. It has been updated to the new syllabus and guarantess a 7.
Unit 3: Macroeconomics .................................................................................................................... 2
Chapter 8: The level of overall economic activity ......................................................................... 2
8.1 Economic activity.................................................................................................................. 2
8.2 Measures of economic activity ............................................................................................ 2
8.3 Calculations based on national income accounting ............................................................ 3
8.4 The business cycle ................................................................................................................ 4
8.4 National income statistics and alternative measures ......................................................... 5
Chapter 9: Aggregate demand and aggregate supply ................................................................... 6
9.1 Aggregate demand (AD) and aggregate demand curve ...................................................... 6
9.3 Long-run aggregate supply and long-run equilibrium in the monetarist/new classical
model .......................................................................................................................................... 8
9.4 Aggregate supply and equilibrium in the Keynesian model ............................................... 9
9.5 Shifting AS curves over the long term ............................................................................... 11
9.6 Implications of the Keynesian model and new classical model ....................................... 11
Chapter 10: Macroeconomic objectives 1 ................................................................................... 12
10.1 Low unemployment ......................................................................................................... 12
10.2 Low and stable rate of inflation....................................................................................... 14
10.3 Exploring the relationship between unemplyoment and inflation ................................ 18
Chapter 11: Macroeconomic objectives 2 ................................................................................... 19
11.1 Economic growth.............................................................................................................. 19
11.2 Sustainable level of government debt............................................................................. 22
Chapter 12: Economics of inequality and poverty ...................................................................... 23
12.1 Inequality .......................................................................................................................... 23
12.2 Poverty.............................................................................................................................. 24
12.3 Causes of economic inequality and poverty ................................................................... 26
12.4 the impact of income and wealth inequality .................................................................. 27
12.5 Policies to reduce income and wealth inequalities and poverty.................................... 28
Chapter 13: Demand-side and Supply-side policies .................................................................... 31
13.1 Introduction to macroeconomic policies......................................................................... 31
13.2 Demand management and monetary policies ................................................................ 32
13.3 Demand management and fiscal policy .......................................................................... 36
13.4The Keynesian multiplier .................................................................................................. 38
13.6 Supply-side policies .......................................................................................................... 39
13.7 Evaluation of demand-side and supply-side policies to promote low unemployment,
low and stable rate of inflation and economic growth........................................................... 42
,Unit 3: Macroeconomics
Chapter 8: The level of overall economic activity
8.1 Economic activity
The circular flow of income model
o Reviewed in Chapter 1 (Go Back)
o The circular flow of income shows that in any time period, the value of output
produced in an economy is equal to the total income generated in producing that
output, which is equal to the expenditures made
o Leakages from the circular flow of income are matched by injections into the circular
flow of income, though these need to be equal to each other.
8.2 Measures of economic activity
Measures of economic activity
o National income accounting - Involves measuring an economy’s national income or
the value of output
o National output – output of an economy
Why is knowing national income and national output important
o Assess an economy’s performance over time
o Make comparisons of income and output performance with other economies
o Establish a basis for making policies that will meet economic objectives
How economic activity is measured
o There are three ways to measure the value of national output (or aggregate output)
suggested by the circular flow of income model
Expenditure approach – adds up all spending to buy final goods and services
produced within a country over a time period
Income approach – adds up all income earned by factors of production that
produce all goods and services within a country over a time period
Output approach – calculates the value of all final goods and services
produced in a country over a time period
The expenditure approaches
o Total spending is broken into four components:
Consumption (C) – includes all purchases by households in final goods and
services in a year
Investment (I)
Spending by firms on capital goods
Spending on new construction
Government spending (G) - spending by governments within a country
Include ‘public investment’
Purchases of production, including labour
Net exports (X-M) – the value of all exports minus the value of all imports
GDP
o If we add all components of spending, we obtain a measure of aggregate output
(GDP)
o 𝐶 + 𝐼 + (𝑋 − 𝑀_ = 𝐺𝐷𝑃
o GDP allows to see relative contribution of each component and how these might
change over time
The income approach
o Allows to see the relative income shares of different factors of production, how
these might change over time and to make comparisons across countries
, The output approach
o Provides the opportunity to study the performance of each individual sector by
looking at its relative shar in total output
Distinction between GDP and GNI
o GDP is the total value of all final goods and services produced within a country over
a time period, regardless of who owns the factors of production
o GNI is the total income received by the residents of a country, equal to the value of
all final goods and services produced by factors of production supplied by the
country’s residents regardless of where the factors are located
Distinction between nominal and real values
o Nominal GDP and GNI are measured in terms of current prices (prices at the time of
measurement), which does not account for changes in price.
o Real GDP and GNI are measures of economic activity that have eliminated the
influence of changes in prices
o When a variable is being compared over time, it is important to use real values
Distinction between total and per capita values
o GDP per capita – a country is total GDP of that country divided by its population
o Per Capita is important because:
Differing population sizes across countries
Population growth
o Total measures of the value of output and income (GDP & GNI), provide a summary
statement of the overall size of an economy
o Per capital figures are useful as a summary measure of the standard of living in a
country, because they provide an indication of how much total output or total
income in the economy corresponds to each person in the population on average
Real GDP/GNI per capita at purchasing power parity (PPP)
o In order to make accurate comparisons across countries the purchasing power parity
needs to be considers
o Since different countries have different price levels and varying PPP it needs to be
considered to eliminate the influence of price differences on the value of output or
income
8.3 Calculations based on national income accounting
Calculating GNI
o 𝐺𝑁𝐼 = 𝐺𝐷𝑃 + 𝑖𝑛𝑐𝑜𝑚𝑒 𝑓𝑟𝑜𝑚 𝑎𝑏𝑟𝑜𝑎𝑑 − 𝑖𝑛𝑐𝑜𝑚𝑒 𝑠𝑒𝑛𝑡 𝑎𝑏𝑟𝑜𝑎𝑑
o 𝐺𝑁𝐼 = 𝐺𝐷𝑃 + 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑓𝑟𝑜𝑚 𝑎𝑏𝑟𝑜𝑎𝑑
Nominal GDP vs Real GDP
o Nominal GDP measures the value of current output valued at current prices
o Real GDP measures the value of current output valued at constant (base year) prices
GDP deflator
o Used to convert from nominal to real GDP
o 𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟 = × 100
o 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 = × 100
Per capita values
o 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 =
, 8.4 The business cycle
The cyclical patterns and phases of the business cycle
o Real output grows over a long period of time is uneven and irregular
o There are times of rapid growth and slow growth
o Business cycle consists of short-term fluctuations in the growth of real output, which
are alternating periods of expansion and contraction
Phases of the cycle
o Expansion – when there is positive growth in real GDP
During expansion resources increases and the general price level of an
economy begins to rise more rapidly (inflation)
o Peak – represents the cycle’s maximum real GDP
Marks the end of expansion, unemployment of resources has fallen
substantially, and the general price level may be rising rapidly (inflation)
o Contraction – after the peak the economy begins to experience falling real GDP
If contraction lasts 6 months, it is a recession
Characterised by growing unemployment, increase in price level may slow
down a lot
o Trough – the cycle’s minimum level of GDP
Marks the end of contraction
There may be wide-spread unemployment
The long-term growth trends
o Shows how output grows over time when cyclical fluctuations are ironed out
o Potential output – the output represented by the long-term growth trend
How unemplyoment relates to actual and potential output
o When real GDP grow (in expansion phase), firms produce more output and hire
more labour (unemployment falls)
o When real GDP falls, firms cut back on production and lay off workers
(unemployment rises)
o Full employment – all labour resources, are employed to the greatest extent
possible (not necessarily ‘full employment’)
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