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Unit 2: Macroeconomic Notes AS/ A-Level
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Covering the whole economics specification for Macroeconomics Unit 2 course in- depth notes
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Economics Macroeconomic NotesSpecification
This unit provides an introduction to how the level key macroeconomic activity is determined and to key
macroeconomic indicators, problems and policies
Aggregate demand and aggregate supply and their interaction
The components of, and influences upon aggregate demand:
consumer expenditure;
investment;
government spending;
exports minus imports.
The factors that influence aggregate supply:
changes in the costs of production;
changes in the quantity and quality of resources.
The effects of changes in aggregate demand and aggregate supply on:
output;
price level;
employment.
The circular flow of income, the concepts of leakages and injections, and a general awareness of the multiplier effect.
Candidates should be able to
define aggregate demand, describe the components of aggregate demand and explain what
determines each of them;
recognise that aggregate demand and the price level are related;
explain why the aggregate demand curve may shift;
define aggregate supply and explain why the aggregate supply curve may shift;
define what is meant by equilibrium in the macro-economy, explain how it is determined and
why it may change;
understand what is meant by circular flow of income;
show a general awareness of the multiplier effect and the concepts of leakages and injections:
discuss how changes in aggregate demand and aggregate supply may affect output and inflation
Government economic policy objectives and Indicators of national performance
Government policy objectives for the macro-economy:
economic growth;
employment/unemployment;
inflation;
the balance of payments;
income redistribution;
economic stability.
The meaning and measurement of:
economic growth
unemployment
inflation
the balance of payments.
The use of data to measure economic performance, including international comparisons.
Candidates should be able to define:
economic growth,
unemployment,
, inflation,
the balance of payments,
income redistribution,
economic stability;
Show an awareness of trends in:
economic growth,
unemployment,
inflation,
the current account of the balance of payments;
Understand the objectives of government economic policy in terms of:
economic growth,
employment/unemployment,
inflation,
balance of payments,
economic stability,
income distribution;
define GDP and real GDP;
The causes and consequences of:
inflation;
unemployment;
a deficit or surplus on the current account of the balance of payments.
The costs, benefits and sustainability of economic growth.
An understanding of how exchange rates are determined and how changes in the exchange rate
influence export and import prices, aggregate demand and macroeconomic policy objectives.
Candidates should be able to
explain how economic growth, unemployment and inflation are measured in the UK;
discuss the difficulties of their measurement;
outline the structure of the current account of the balance of payments accounts of the UK
economy;
explain the causes of:
economic growth,
unemployment,
inflation,
a deficit or surplus on the current account of the balance of payments;
discuss the consequences of:
unemployment,
inflation,
a deficit or surplus on the current account of the balance of payments;
discuss the costs, benefits and sustainability of economic growth;
outline how exchange rates are determined
by the demand and supply of currencies;
, recognise that a fall in the exchange rate will lower export prices and raise import prices and
aggregate demand (and vice versa);
explain how changes in the exchange rate may affect the macro-economy.
The application of macroeconomic policy instruments and the international economy
The nature of policies:
fiscal;
monetary;
supply side.
The use and effect of these policies on:
the level of employment and unemployment
the rate of inflation
economic growth
the current account of the balance of payments position.
Possible conflicts between policy objectives.
Awareness of the general nature and benefits of international trade.
Free trade vs. protectionism.
Candidates should be able to:
define policies: – fiscal,
monetary,
supply side;
Discuss, using the AD and AS model, the ways in which fiscal, monetary and supply side policies can
affect:
unemployment,
inflation,
economic growth,
the current account position of the balance of payments;
Discuss how effective fiscal, monetary and supply-side policies are in achieving the government's
macroeconomic objectives;
Discuss the reasons for, and consequences
The Measurement of macro-economic performance
In the first part of the course you have studied microeconomics which is concerned with individual
markets like agricultural markets, housing markets, oil markets and the labour market. In micro
economics we consider individual firms and industries where the operation of demand and supply
leads to equilibrium.
In this part of the course we look at the operation of the economy from a macroeconomic
perspective - considering the economy as a whole - the total quantities of goods and services
produced by all firms in the economy. We are no longer looking at individual or household demand
but total or aggregate demand from all areas of the economy.
To judge how well an economy is performing on the macroeconomic front economists consider its
performance in a number of “key” areas. These areas tie in very nicely with what are known as the
“Macroeconomic objectives”. These are the objectives that most governments have for the economy
and can be seen as the following:
, Economic Growth – is our capacity to produce goods and services growing over time?
Full Employment – is our economy efficient or do we have resources lying idle?
Stable Prices – are we able to control prices so that we are competitive with other economies or
are prices out of control?
Balance of payments – Are we living within our means – are we buying more from other
countries than we are selling to them?
Balance of Payments – The difference between currency flowing out of a country and currency
flowing into a country usually due to the sale of exports and purchase of imports
The policy of any government is to try and ensure that they obtain these objectives but some
governments may put more emphasis on one objective rather than another. Countries measure
economic performance to see whether their economies are improving over time e.g. is the economy
creating more jobs than it did ten years ago? They can also be used to measure comparative
economic performance e.g. is our economy growing at a faster rate than that of France? In order to
measure economic performance quantitative data is required, that can be compared over different
time periods.
1. How we measure macroeconomic performance
1.Growth
Economic growth – the capacity of the economy to produce more goods and services over time
One important measure of an economies performance is whether it can deliver more goods and
services to its members over time. This is known as economic growth and is measured by looking at
the change in the level of output. Economists have realised for years that growth is not a steady
linear process but proceeds in fits and starts, usually referred to as the economic cycle.
The actual growth rate shows the performance of an economy at a particular point in time while the
trend growth rate is the average performance of the economy over time. The trend growth rate for
the UK economy is thought to be about 2.5% - 2.75% per annum. We can judge the economy as to
whether it is performing above or below its trend value and how its growth rate compares to other
economies
In figure 1 at OA the actual growth is below trend which is likely to mean lower than expected levels
of output and higher levels of unemployment. At OB actual growth is above trend which means that
the economy is growing more rapidly than is usual and incomes will be increasing. This is likely to
imply that most unemployed factors have been taken up and if aggregate demand exceeds
aggregate supply prices will be rising
Figure 1
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