Macro

• Macroeconomics objectives


  • Scarce resources (equal distribution of resources)
  • Low unemployment level
  • Stable inflation rate
  • National Debt
  • Income distribution
• Stakeholders in an open economy


  Additional stakeholders compared to a closed economy
• Methods to measure national income/GDP

  1. Expenditure method (spending money)

  2. Output method (circular flow of income model)

  3. Income method
• GDP


  The value of all final goods and services produced within an economy over a period of time
• GNI


  The income earned by all national factors of production independently of where they are located over a period of time
• Real GDP


  The value of all final goods and services produced within an economy over a period of time, adjusted to inflation
• Real GNI


  The income earned by all national factors of production independently of where they are located over a period of time, adjusted to inflation
• GDP per Capita


  GDP divided by the population of a country
• GNI per capita


  GNI divided by the population of a country
• Uses of national income statistics


  • Economic growth
  • Standard of living
  • Policy development
  • Forecasting
  • Business planning
  • International comparisons
• Limitations of income statistics

  • Inaccuracies
  • Unrecorded or under recorded economic activity (informal markets)
  • Some position of GDP is missing and not included in data
• OECD better life index

  Organization for economic cooperation and development: Improve economic and social well being around the world
• Happiness Index (UN)


  They rank the happinest to lead happiest countries
• Happiness Planet Index


  Well being, life expectancy, inequality, ecological footprint
• Business cycle


  The periodic fluctuations in economic activity measured by changes in real GDP
• Recession


  Two consecutive quarters of negative GDP growth
• Aggregate Demand


  The total spending on goods and services in a period of time at a given price level
• Components of Aggregate Demand

  • Consumption
  • Investment
  • Government spending
  • Exports - Imports
• Consumption


  Spending by consumers on goods and services
• Factors affecting Consumption


  • Interest rates
  • Disposable income
  • Change in income tax
  • Change in Wealth
  • Change in consumer confidence/expectations
  • Levels of household indebtedness
• Investment


  Investment done by firms when purchasing capital (machines)
• Factors affecting Investment


  • Business tax
  • Technology changes
  • Change in business confidence/expectations
  • Levels of corporate indebtedness
• Fiscal policy


  A demand side policy targeted to reach macro economic objectives through changes in taxes and government spending
• Types of fiscal policy

  • Contractionary fiscal policy
  • Expansionary fiscal policy
• Factors affecting Imports and Exports


  • Changes in levels of exports
  • Change in level of imports
  • Relative inflation between countries
• Aggregate Supply


  The planned level of output domestic firms are willing and able to offer at different average price levels
• Factors shifting the Short Run Aggregate Supply curve

  • Change in wage rate
  • Change in the cost of raw materials
  • Change in price of imports
  • Changes in subsidies and tax
• Long Run Aggregate Supply

  Vertical because the economy is at its full capacity. It is impossible to increase production in response to growing aggregate demand. However the LRAS curve can shift due to improvement in quality or quantity of capital, enterprise land or labor aka potential growth
• Government policies to achieve macroeconomic objectives

  • Demand-side (impact AD)
  • Supply-side (impact LRAS)
• Demand-side policies


  • Monetary
  • Fiscal
• Supply-side policies


  • Market-based
  • Interventionist
• Fiscal policy


  A demand-side policy using changes in government spending and/or direct taxation to influence aggregate demand and thus growth, employment and prices
• Sources of government revenue


  • Indirect taxes
  • Direct taxes
• Types of government expenditure

  • Current expenditures
  • Capital expenditures
  • Transfer payments
• Types of government budget

  • Budget surplus
  • Budget deficit
  • Balanced budget
• Expansionary fiscal policy


  When the government decreases taxes and/or increases government spending to increase AD, and thus expand the economy
• Contractionary fiscal policy


  When the government increases taxes and/or decreases government spending to decrease AD, and this contract the economy
• Strengths of fiscal policy


  • The ability to target specific sectors
  • The ability for a government to promote economic activity during a recession/ time of need
  • Redistribution of income and equity
  • Achieving macroeconomic objectives
  • Automatic stabilizers (HL)
  • The multiplier effect (HL)
• Constraints on/ weaknesses of fiscal policy

  • Political pressures
  • Time-lags
  • Sustainable debt
  • Conflicting objectives/ unintended consequences
  • Assumes efficiency and competency from a government
  • Crowding out (HL)
• Monetary policy


  A demand-side policy using changes in the money supply or interest rates to achieve economic objectives relating to output, employment and inflation