Macroeconomi

cs
 What is macroeconomics?

Macroeconomics is the study of the whole

economy. In the name itself, we can tell that it
involves a wide range of topics in all sorts of
economics because ‘macro’ means large-scale.
It focuses on aggregate (considered as whole)
in the economy. This can include Gross
domestic product (GDP), Inflation, and
changes in the unemployment rate.
 Factors,
comparison,
and decision
making
 Macroeconomic factors
An economy’s macroeconomic factors determine whether it is
experiencing growth or decline. In macroeconomics, it is possible to
divide the factors into two - positive and negative based on the way it
affects the economy. Let’s take an example of a natural disaster, it
will affect the sales and production of goods negatively while a
higher production ate because of a high demand will affect the
economy in a positive way. These factors are studied by professionals
to better help conclude the financial health of a country.

Positive macroeconomic factors - These increase the cash flow of the

country, increase the aggregate demand and aggregate supply and
create financial stability

Negative macroeconomic factors - These include policies that stunt

economic growth and sudden or unforeseen situations that could
result in high unemployment and high inflation.

Interest rates
Economic growth is greatly
affected by a nation's currency
value. Investing money in a
country's financial system results
in interest rates, which
determines the amount of return
earned.
Gross domestic product
(GDP)
A country's gross domestic product measures
the value of its goods and services. Besides
measuring government and citizen spending,
GDP also measures the financial impact of
trade and investment within a nation.
Some macroeconomic factors
Inflation
Inflation occurs when the price of goods or
services increases consistently over time. A
rapid rise in inflation is usually connected
with economic instability or a recession,
whereas steady inflation is usually regarded
as economic normalcy.
National income
In contrast to its GDP, national
income is the sum of the money
that a country generates from its
economy as a whole.
Fiscal policy
Fiscal policy measures are based
on taxation and government
spending. They strive to control
aggregate demand of an
economy and also control
inflation.
employment
An economy that is stronger is one that has a
higher employment rate compared to those
who are unemployed. Citizens who are
employed are more likely to spend than
unemployed citizens, which boosts economic
activity.

microeconomic
s
Involves how individuals,
households and firms behave in
markets.
Examples include:
● Why do individuals buy
more of a particular product
when its price falls?
● What happens to the demand
for cars when household
income increases?
● What happens to food prices
when there is a drought?
● Why do star football players
get paid huge wages?
What is the difference and connection between
macroeconomics and microeconomics?
CONNECTION
The concepts used in microeconomics are
also used in macroeconomics, just on a
different level or scale. An example could be
comparing the demand of a product and the
aggregate demand of the economy. The
decisions made in both of the studies will
affect the other. A decision in
macroeconomics will affect microeconomics
and vice versa.
macroeconomics
Involves a wide range of topics in
all sorts of economies.
Examples include:
● Why has India’s economic
growth increased above that
of China in recent years?
● What are the main causes of
inflation in Pakistan?
● How important is
international tourism for the
economy of Mauritius?
● What might be the effects if
the EU imposes a tariff on
UK vehicle exports when
the UK leaves the EU?

households
Buyers that are also known Firms are business concerns that produce goods
as consumers, savers, and
workers
Decision making in the
Economic agents
economy
Those who undertake economic
activities and make economic
decisions
Firm government
s
Government is the system which
and services, and employ workers and other rules a country or region. It provides
factors of production some products, benefits and
regulates the private sector
 Aims of decision makers in an
economy

Households firms government

As consumers : Low As much profit as Wants a-
prices and good possible Strong economy
quality products
Full employment of
As workers : Good labour
working conditions
and high pay Improve the
performance of
As savers : They individual markets
want their money to
be safe and a good
return
 The
government
and the
macroecono
my
 Governments’ macroeconomic
aims
Low
Economic growth unemployment Price stability

Balance of Redistribution of
payments stability income
Econom
ic
Growth
 Economic growth-definition and types
Economic growth is an increase in the output
of an economy in the long run, an increase in
the economy’s productive potential. It can be
classified into two categories - Actual
economic growth and Potential economic
growth. The difference can be shown on a
PPC (production possibility curve).
Governments usually set their target for
economic growth as 2% or 3% but it may
differ according to developing or
underdeveloped countries.
Actual economic growth : An increase in the
output of an economy In the above diagram, the shift from point A to
point B represents actual economic growth
Potential economic growth : an increase in an because more goods are being produced. The PPC
economy’s productive capacity. shift from YY to ZZ represents potential
economic growth because the economy is capable
of producing more.
 Aggregate demand and aggregate supply

Aggregate demand Aggregate supply

Aggregate demand is the total demand for a country’s product at a Aggregate supply is the total amount of goods and services that
given price level. domestic firms are willing to supply at a given price level.

We can calculate aggregate demand by using this formula- Aggregate supply is perfectly elastic if the economy has a
Consumer expenditure + Investments + Government spending + significant number of unemployed resources,
(exports - imports)
The AS curve becomes more inelastic as the economy approaches
Consumer expenditure is the spending of households on goods full employment, since then firms will be competing for resources.
and services. Investments is the spending by the private and
public sectors on capital goods. Government spending is how Aggregate supply will increase if the costs of production fall and
much the government spends on state provided goods and the quantity or quality of resources increase.
services. Exports minus imports is called net imports.
A fall in the country’s price level causes an extension in aggregate
demand.
The aggregate demand will increase due to an increase in
population, a cut in the rate of interest, a lower exchange rate and
higher confidence
 Actual economic growth

When the aggregate supply (AS)

and Aggregate demand (AD)
change, it affects the
macroeconomy. Here in this
diagram we can see actual economic
growth. As AD has shifted to AD1.
This has increased the country’s
output and we can also observe an
increase in the GDP as it shifts from
Y to Y1. This has also resulted in a
small rise in the price level
eal GDP
 Potential economic growth

This diagram shows us the potential

economic growth. The maximum
amount that the economy can
produce has increased as AS shifts to
AS1 while AD stays the same.
 Potential economic growth and national output
In this diagram, we can see how
potential economic growth cause an
increase in national output. The
quantity and quality of resources has
no impact but an increase in
productive potential occurs when an
economy is operating close to full
employment, it can cause a rise in the
country’s output and a fall in the
price level. We can see in the
diagram how AS shifts to AS1 as the
price decreases from P to P1 and the
real GDP increases from Y to Y1.
 Reasons and criteria

Reasons why government aim for economic growth

Economic growth can improve living standards through more goods and services
being available. It increases life expectancy and allows better health, education and
housing. Economic growth may also help the government achieve its other
macroeconomic aims. If the output increases, employment will rise and if it
matches the higher demand, the upward pressure on the price can be avoided. A
country’s trade position may be improved if the surplus output is exported. Along
with this, the poor may gain jobs and some can be helped by the extra tax revenue.

Criteria that governments set for economic growth

Possible economic growth = level of output + growth in productive capacity.
Governments want their economies to work at full capacity. They set a target for
the economic growth rate of their economies based on the possible economic
growth rate.
 Low
unemployme
nt
 Low unemployment

Governments try to achieve as low a level of unemployment as possible, this can be expressed as
full employment. We can classify the population into two parts - economically active and
economically inactive.

Economically active : being a member of the labour force. This can include people who are in work
or ar unemployed but seeking work.

Economically inactive : people who are not willing to work or are unable to. They include children,
the retired, those engaged in full-time education, home makers and ill or disabled.

The unemployment rate is a percentage of the labour force or the economically active individuals. It
is the percentage of the labour force who are willing and able to work but are without jobs. We can
calculate this by -

Unemployment
X 100
Labour force
 Reasons and criteria

Reasons why government aim for Low unemployment

It is a waste of resources. Those unemployed also suffer disadvantages like
low income and government revenue will have to be spent of supporting them.

Criteria that governments set for unemployed

It is not possible to achieve 0% unemployment as even in a strong economy,
when people change jobs they remain unemployed for short periods of time.
This is why government aims for a low rate of unemployment. The most
common rate of unemployment in countries is 3%.
 Price
stability
 Price stability

Price stability means that the price level in the economy is not
changing significantly over time. The prices of rival products
may fall and rise but the price paid by households remains
stable. It is essential for international competitiveness. Firms
plan ahead by agreeing export prices, setting domestic prices
and agreeing wage increases for workers.
 Reasons and criteria
The reasons why governments aim for price stability
It ensures greater economic activity and prevents the country’s products from losing international
competitiveness. They can plan with greater confidence and not act in a way that will cause prices to rise
in the future. Firms will not raise their prices because they expect their costs to be higher, households
will not bring forward purchases for fear that items will be more expensive in the future and workers will
not press for wage increases just to maintain their real disposable income.

Criteria that governments set for inflation

Inflation rate : the percentage rise in the price level of goods and services over time.
Governments usually have a target inflation rate of 2%. Governments do not aim for unchanged prices
due to two major reason. First reason being that measures of inflation tend to overstate rises in prices.
Some of the prices paid by people are lower than those appearing in the official price level indices, as
people buy some products at reduced prices in sales and also make second-hand purchases. Price rises
can also hide the improvements in products. The second reason is that a slight rise in prices can provide
some benefits. It can encourage producers to increase their output as they may think that higher prices
will lead to higher profits. It can also enable firms to cut their wage costs by not raising wages in line
with inflation. The alternative to such a move might be a cut in unemployment. Governments also try to
avoid a fall in the price level if it is caused by a high aggregate demand. It can result in a decline in
output and a rise in unemployment.
Balance of
payments
stability
 Balance of payments stability

Balance of payments is the record of a country’s economic transactions with other

countries. Over the long run, most governments want the value of their exports to
equal the value of their imports so that what the country earns from exports equal
what it spends on imports. In a best-case scenario, the balance of payments should
be zero when all the elements are correctly included. Thus, the inflows and
outflows of funds should balance. The majority of the time, this does not occur.

In a balance of payments statement, a country's exports exceed its imports. This

indicates a surplus or deficit in funds, i.e. if its exports are greater than its imports,
the balance of payments is in surplus. Conversely, a balance of payments deficit
indicates that imports exceed exports.
 Reasons and criteria

Reasons why governments aim for balance of payments stability

If imports exceeds revenue from imports in the long run, the country will get
into serious debt. If export revenue is greater than import expenditure, the
economy will lack variety of product and the inhabitants will not enjoy as
many products as possible.

Criteria that government set for balance of payments stability

Contradicting the aim, the government may not mind if there is a surplus of
export revenue over import expenditure or a deficit of export revenue only if it
is short term. Short-term deficits and surpluses may also arise from
fluctuations in income at home and abroad.
Redistributio
n of income
 Redistribution of income

Most governments have a policy of seeking to redistribute income from the

rick to the poor. This is done my taxing high-earners more heavily than those
on lower incomes, and by providing various types of subsidies and in some
cases, welfare and unemployment benefits. The primary objective of income
redistribution is to promote economic stability and opportunity for society's
less wealthy members (basically closing the economic gap between rich and
poor). As a result, it often includes funding for social services as well. Taxes
pay for the majority of these public services, so proponents of income
redistribution believe that taxing the richer members of society more will
benefit underprivileged people.
 Reasons and criteria

Reasons why governments may seek to redistribute income

Governments try to reduce poverty because of the hardships it
involves. It can eventually grow without government intervention. A
gap between the rich and poor can also cause social unrest as the
poor may feel a sense of social injustice.

Criteria that governments set for income redistribution

Governments are unlikely to aim for a perfectly equal income
distribution.It is because taxing the rich too heavily and providing
too generous benefits may act as a disincentive to effort and
enterprise. And also people might have different needs.
 Possible conflicts between macroeconomic aims

Macroeconomic aim conflict

Full employment versus Stable prices

Increased total demand creates more jobs but increased
costs of production lead to high prices

Economic growth versus Balance of payments stability

Increase in productive potential increase aggregate supply
which increases demand for imports creating instability

Full employment versus Balance of payments stability

Increase in aggregate demand leads to high demand for
imports leading to a deficit
Governme
nt policies
 Macroeconomic
Fiscal policy How it is achieved
aim

Increasing
Economic growth expansionary government

Effect of fiscal spending

Reducing indirect
policy on Reduced
unemployment
expansionary and direct taxation
which increases

government
demand

Cutting government
macroeconomic Reduced inflation contractionary spending or raising
taxes

aims Reduced balance

of payments Contractionary
Raising taxes to
decrease demand
deficit
 Macroeconomic Monetary How it is achieved
aim policy

Economic expansionary Lowering interest rates

growth and growing the money
supply - more investments
Effect of Reduced expansionary Lowering interest rates

monetary policy
unemployment and growing the money
supply - more output and
employment

on government Reduced
inflation
contractionary Raising interest rates and
lowering the money

macroeconomic supply - reduce total

demand and prices.

aims Reduced balance

of payments
contractionary Lowering interest rates
which lowers exchange
stability rate - cheaper exports and
imports
 These policies aim to increase
productive potential and efficiency
Effects of supply-
side measures on These measures can:
● Increase growth
government ● Increase output and employment
macroeconomic ● Do so without increasing inflation
● Improve the balance of payments
aims position since exports increase
and imports fall