Macro Economics notes created from the official textbook with insights from various articles for deeper understanding. Includes exam tips and key diagrams. Perfect for AQA Economics A Level Paper 2 preparation.
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MACRO ECONOMICS
AQA ECONOMICS A LEVEL
,4.2.1 THE MEASUREMENT OF MACROECONOMIC PERFORMANCE
GROSS DOMESTIC PRODUCT (GDP)
● Economic growth occurs when there is an increase in the value of GDP
● Measures the quantity of goods and services produced in an economy
○ Therefore a rise in economic growth → increase in national output
● Economic growth increases standards of living and employment opportunities
DIFFERENT TYPES OF GDP
REAL GDP → GDP adjusted for inflation
→ if the economy grew by 4%, but inflation was 2%, R.GDP was 2%
NOMINAL GDP → the value of GDP without being adjusted for inflation
→ e.g nominal GDP above would be 4%
TOTAL GDP → the combined monetary value of all goods and services produced within a country during a specific time period
GDP PER CAPITA → the value of total GDP divided by the population of a country
→ essentially measures the value average output per person in an economy
→ can indicate the standards of living in a country
LIMITATIONS
1) Doesn’t give an indication of the distribution of income
○ Two countries with similar GDPs may have different distribution of incomes which leads to different
standards of living
2) GDP may need to be calculated in terms of purchasing power parity (PPP) so it can account for international price
differences and the inflation rate
3) Hidden economies are not taken into account in GDP
4) Gives no indication of welfare
OTHER MEASURES OF NATIONAL INCOME
GROSS NATIONAL PRODUCT (GNP)
● includes the income of all of a country's residents and businesses whether it flows back to the country or is spent
abroad.
○ It also adds subsidies and taxes from foreign sources.
● It's the total output of the citizens of a country, whether or not they’re resident in that country
GROSS NATIONAL INCOME (GNI)
● The total amount of money earned by a nation's people and businesses
● GDP + Net income from abroad
○ Income earned by a country on investments and other assets owned abroad minus any income earned by
foreigners on investments domestically
● Calculates the income instead of output
PURCHASING POWER PARITY (PPP)
● When comparing the living standards of two countries with different currencies, the exchange rate can be misleading
● Comparisons tend to be carried out using PPP
● Purchasing power parity is the real value of an amount of money in terms of what you can actually buy with it
● This gives a more accurate and easier comparison
INDEX NUMBERS
● These are useful to make comparisons between over a period of time
● The first year is called the base year (this is always given in the question)
𝑝𝑟𝑖𝑐𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 𝑏𝑒𝑖𝑛𝑔 𝑐𝑜𝑚𝑝𝑎𝑟𝑒𝑑
𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟
𝑥 100
1
,4.2.2 HOW THE MACROECONOMY WORKS
THE CIRCULAR FLOW OF INCOME
● Firms and households interact and exchange resources in an economy
● Household supply firms with the factors of production
○ Labour and capital
● In return households receive wages and dividends
● Firms supply households with goods and services
○ Consumer pay for these
● Firms receive money for these goods and services
● Income = output = expenditure
INJECTIONS AND WITHDRAWALS
INJECTION → MONEY WHICH ENTERS THE ECONOMY WITHDRAWAL → MONEY WHICH LEAVES THE ECONOMY
Government spending on public goods and welfare payments Saving income removes it from the circular flow
Exports - firms receive money from abroad for their goods and services Taxes decreases the amount of money consumers spend
NET INJECTIONS → EXPANSION OF NATIONAL OUTPUT Imports - money is paid to another country for their goods and
services, which will leave the economy
NET WITHDRAWALS → CONTRACTION OF PRODUCTION → OUTPUT
DECREASES
2
, AGGREGATE DEMAND
● A change in any of the components of the AD formula will cause a shift in the AD curve
● A change in price will cause a movement along the curve
CONSUMPTION
● Disposable income → the amount of income that consumers have after paying taxes and are able to spend
○ It is what consumers can choose to spends
● If consumers have more disposable income, then they increase consumption, which increases AD
○ Consumption makes up 60% of AD
● Dependent on the marginal propensity to consume
GOVERNMENT SPENDING
● This is how much the government spend on the state goods and services
● Makes up to 20% of AD
INVESTMENT
● Capital investment is the acquisition of physical assets by a company for use in furthering its long-term business goals
and objectives
NET TRADE BALANCE
● The value of the current account on the balance of payments
○ Exports minus imports
THE MULTIPLIER PROCESS
● Occurs when there is new demand in an economy
● Leads to an injection of more income into the circular flow → economic growth → more jobs created → higher incomes
→ more spending → more income
● Refers to how an initial increase in AD leads to an even bigger increase in national income
● The multiplier ratio → rise in national income : initial rise in AD
MARGINAL PROPENSITY TO CONSUME
● How much a consumer changes their spending following a change in income
● The higher the MPC, the larger the multiplier effect
● Government can influence MPC by changing the rate of direct tax
○ Decreased tax → more disposable income → higher propensity to consume
MARGINAL PROPENSITY TO SAVE
● The proportion of each additional pound of household income that is used for saving
● marginal propensity to save + marginal propensity to consume is equal to 1
● If consumers save more than they spend, the size of the multiplier will be small
CALCULATING THE MULTIPLIER
1
1− 𝑀𝑃𝐶
= 𝑀𝑈𝐿𝑇𝐼𝑃𝐿𝐼𝐸𝑅
EXAMPLE:
If consumers spend 0.6 of every €1 they earn, they save 0.4
1
Therefore the multiplier will be 0.4
= 2. 5
This means that every €1 of income generates €2.50 of new income
3
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