Macroeconomics

• Economic growth

  • Increase in total output of goods and services in a national economy
  • Measured by the annual increase in real GDP
• Unemployment

  • People who are willing and able to work but are unable to because of the lack of suitable opportunities
  • Measured by the percentage of the working population seeking work or receiving unemployment benefits
• Inflation

  A sustained increase in the average price of goods and services available for sale in an economy
• Balance of payments

  • International trade involves the exchange of goods and services and money over a national border
  • Balance of payments of a country provides a record of all financial transactions with other countries
• Aggregate demand

  • Total demand for all goods and services produced in an economy
  • Sum of total planned expenditure for a given price level by households, firms and governments and foriegn sector
• Factors affecting aggregate demand (total expenditure)

  • Consumer expenditure
  • Investment expenditure
  • Government expenditure
  • Exports
• Aggregate supply


  Total supply of all goods and services in an economy
• Factors affecting aggregate supply

  • Availability of factors of production
  • Cost of factors of production like wages
  • Taxes and subsides
  • Supply – side shocks like war or pandemics
• Gross Domestic Product (GDP)


  The total market value of all final goods and services produced in a macroeconomy in a given time period
• GDP per capita


  The market value of goods and services for each individual in the economy (GDP per head). Indication of average income per person. Real GDP/ population
• Output Method


  • Involves adding up the value of output produced each period by every firm in every industry in an economy
  • Only the final outputs should be counted (otherwise double counting of the value of outputs could occur)
  • Businesses add value to the resources it uses when making outputs
  • Gross Value Added (GVA): market value of a firms output of goods and services - the value of inputs used in the production of outputs
• Income Method


  • Measures the total income earned from the production of goods and services produced within an economy
  • Includes profits earned by companies and other business organizations, wages and salaries of employees and self-employed
  • Excludes transfer payments (unearned income): welfare payments, state pension, unemployment benefits
• Expenditure Method


  • value of output is measured by adding up the total amount spent on all finished goods and services produced in an economy
  • Includes spending by households called Consumption (C)
  • spending by firms called Investment (I)
  • spending by government called Govt. Spending (G)
  • spending by foreigners on exports – spending on imports called Net Exports (X-M) GDP
• Why we calculate GDP

  • Helps the government reallocate resources efficiently
  • Indicates whether the economy is better off than before. Compares the living standards of one year to another
  • Useful in comparing living standards in different countries
• Economic Growth


  • Increasing total output produced by resources in an economy
  • Measured by increase in real GDP
  • Helps keep price inflation low and stable
• Achieving Economic Growth

  • Discovery of more natural resources (increases output but is expensive)
  • Investment in new capital and infrastructure (for firms to increase SOP and reduce their COP)
  • Technical progress (increase productivity, make new products)
  • Increasing the quantity and quality of human resources (labour – education, training, healthcare)
  • Reallocating resources (boosts output and growth)
• Benefits of Economic Growth


  • greater availability of goods and services to satisfy consumer wants and needs.
  • Higher level of consumption, output, income
  • Higher tax revenue
  • Increase employment and incomes
  • Low and stable inflation. growth in output = growth in demand
  • Increases sales, profits and business opportunities
  • improved living standards
• Costs of Economic Growth


  • More capital goods and fewer consumer goods
  • Technical process replace labor
  • Scarce resources being used up fast
  • Exploitation of non-renewable resources
  • Market failure
  • Higher levels of inflation
  • pollution / harm to environment
• Recession (Negative Economic Growth)


  • When a country experiences periods of falling GDP
  • Economic recession: short period of negative growth that may last 6 months or even a few years after which the economy recovers and continues to grow again
  • Economic depression: 'slump' which may last several years where there is continuous fall in real GDP
• During negative growth, a country will be producing below its productive capacity (point inside the PPC)
• Costs of negative growth

  • Unemployment will be high
  • Fewer goods and services will be produced
  • Due to unemployment, income will fall and reduce living standards
  • The fall in real GDP will affect the quality of life
• Shapes of Economic Recessions

  • U – shaped = prolonged slump
  • V – shape = short lived contraction followed by a rapid recovery
  • Double dipped recession = short-lived, recovery, another recession
• Unemployment

  When an individual who is part of the labour force is actively seeking for a job but is unable to find one
• Key employment indicators

  • Labour force: total number of people of working age in work or actively seeking work
  • Labour force participation rate: labor force as a proportion of the total working age population
  • Employment by industrial section: number of people working in an agriculture or manufacturing industries, relative to services
  • Employment status: number of people employed full time, part time or in temporary work
  • Unemployment: number of people registered as being without work and as a proportion of the total labor force (unemployment rate)
• Labor force

  • The working population of a country
  • Includes: Employed, Self employed, Armed forces, The unemployed seeking jobs
  • Excludes: Young, Stay at home parents, Students, Old and severely disabled, People who don't want to work
• Frictional unemployment

  • People who are in between jobs (higher pays, moving, sacked). workers leave one job and spend time finding another
  • Usually for short periods
• Seasonal unemployment

  • Occurs because consumer demand for some goods and services is seasonal
  • Example, tourist industry like hotels and holiday resorts or agriculture and construction
• Cyclical unemployment

  • Occurs when there is too little demand for goods and services in an economy during an economic recession
  • Stocks of unsold products will build up and firms will have to cut production
• The multiplier effect

  • Fall in aggregate demand having a widespread effect
  • Falling demand for products leads to firm reducing output which then leads to unemployment then because unemployment rises, aggregate demand falls and firms cut demand for labour even more and the cycle repeats
  • a small change in expenditure causes a much larger change in income output and employment.
• Structural unemployment


  • Long term changes in the structure of the economy as entire industries close bc of low demand or due to goods and services moved to countries overseas to produce for lower average cost
  • When there is a mismatch of available labor skills and the demand in an economy (Occupational immobile)
  • Structural change can cause regional unemployment if most firms in the affected industries are located in one area
• Technological unemployment

  • Industrial robots, computerized machinery has replaced labour in many sectors of the economy
  • Such as banks, retailers, photo editors
• Labour market barriers or failures


  • Powerful trade unions may force up wages and employers may not be able to afford wages
  • Unemployment benefits may reduce the incentive to work
  • Other employment costs can reduce demand for labour such as taxes sickness maternity and paternity costs and training costs
  • Lack of information can prevent people from finding jobs
  • Minimum wage laws may reduce labor demand especially for low skilled workers
  • Labour immobility can prevent people from finding jobs
• Costs of unemployment (Personal)

  • Loss of income
  • Lower living standards
  • Dependency on unemployment benefits
  • Deskilled people if unemployment becomes long term
  • Depression, illness, anxiety
  • Crime
  • Drugs and alcohol abuse
• Costs of unemployment (Economic/society)


  • Higher taxes
  • Fall in tax revenue
  • Reduce government spending
  • Opportunity costs and public and merit goods
  • Lower living standards for the economy
• Fiscal costs of unemployment


  • The government faces when providing unemployment benefits that cover basic necessities
  • If unemployment rises, public expenditure on benefits rises
  • Tax revenue would be less as incomes are falling
  • Government will cut back on public expenditure so less public and merit goods like healthcare and education and roads
  • Living standards will fall
• Demand-side policies


  • Fiscal and monetary policy used to boost demand during recession
  • Fiscal policy: includes tax cuts to increase disposable income and public spending on public goods like capital projects to make new jobs
  • Monetary policy: includes reducing interest rates to make borrowing money cheaper close up the government may also boost money supply
  • Provides short term boost to the total demand and to reduce cyclical unemployment
  • It is best to combine these policies with supply side policies as if the demand is boosted too much, it can lead to higher rates of inflation
• Supply-side policies


  • Measures to reduce occupational immobility (structural and technical unemployment)
  • Regional subsidies (regional concentrations of structural unemployment)
  • Employment subsidies
  • Labor market reforms: reducing power of trade unions, reduce minimum wages, reducing unemployment benefits, cutting marginal rate of income tax
• Inflation


  The sustained and general increase in the level of prices of goods and services within a specific time period, usually MoM or YoY
• Hyperinflation


  Runaway inflation during which prices rise at phenomenal rates and money becomes almost worthless
• Consumer Price Index (CPI)

  CPI in year … = (weighted average price year 1 / weighted average price base year) x 100

  
  

  CPI in the base year is always 100.

  CPI < 100 = deflation

  CPI > 100 = inflation