Business and Technology – Study Notes Chapter 05: Macroeconomics
CHAPTER 05
MACROECONOMICS
LO # LEARNING OBJECTIVE
PART A– MACROECONOMICS
LO 1 AMIS/OBJECTIVE OF MACROECNOMIC POLICIES
LO 2 GDP AND ITS CALCULATION
LO 3 FACTORS AFFECTING DETERMINATION OF GDP
LO 4 AGGREGATE DEMAND (AD) AND SHIFT IN AD CURVE
LO 5 AGGREGATE SUPPLY (AS) AND SHIFT IN AS CURVE
LO 6 BUSINESS CYCLE AND ITS INDICATORS
PART B– MACROECONOMIC AIMS/OBJECTIVES
LO 7 ECONOMIC GROWTH
LO 8 INFLATION
LO 9 UNEMPLOYEMENT
PART C– MACROECONOMIC POLICIES
LO 10 BUDGET SURPLUS AND DEFICIT
LO 11 TAXATION
LO 12 MONETARY POLICY
LO 13 SUPPLY-SIDE POLICY
LO 14 BALANCE OF PAYMENTS AND FREE TRADE
1
,Business and Technology – Study Notes Chapter 05: Macroeconomics
Introduction to Macroeconomics
Definition:
Macro means large. Macroeconomics deals with overall performance of the economy(economy as a
whole, usually at the national level.).
Governments want to improve their national economy. They use macroeconomic policies to do this
LO 1: AMIS/OBJECTIVE OF MACROECNOMIC POLICIES:
1. Real gross domestic product (GDP) growth:
Economic growth means an increase in GDP (Increase in the economy’s real output) of a nation over
time. This will increase the wealth of the country and standard of living of people.
2. Controlled inflation / Price stability: (or low inflation)
Government ensures there is no or low inflation ensuring stability in prices and exchange rates.
3. Full employment: (or low unemployment)
Government has social objective to achieve full employment level:
to ensure maximum utilization of human resources and increase national output, and
to reduce crimes, or social security payments as a result of unemployment.
Supporting Aims
Governments may also set supporting aims for specific areas of the economy:
1. Control prices of essential goods and services
2. Attract foreign investment
3. Maintain a favourable balance of payments (exports vs imports)
4. Encourage producers to move up the value chain
5. Improve economic capacity and infrastructure (supply-side focus)
6. Manage the local currency’s foreign exchange rate
LO 2: GDP AND ITS CALCULATION:
Gross Domestic Product (GDP) or National Income:
“GDP is the aggregate market value of all goods and services produced within boundaries of a
country in a given period.”
Calculation of GDP:
GDP is calculated by adding up the following components:
1. Consumption (C): Local spending on goods and services. e.g. local travel, rent, energy.
2. Investment (I): Business spending on assets. e.g. Machinery, premises, production systems.
3. Government Spending (G): Government’s expenses. e.g. public services, direct investment,
goods and services.
4. Net Exports (X – M): Exports minus imports. e.g. Trade goods, cross-border services.
2
, Business and Technology – Study Notes Chapter 05: Macroeconomics
Study Tip – Gross National Product (GNP)
Gross National Product (GNP) is similar to GDP, with the addition of international cash flows. It measures the
total economic output of a country’s residents.
GNP = GDP + Income from abroad − Income paid abroad
1. GNP includes international cash flows, while GDP does not.
2. A high GNP (relative to GDP) may result from large remittance inflows.
LO 3: FACTORS AFFECTING DETERMINATION OF GDP:
1. Consumption (C):
Factor Description
Consumer wealth More income or credit → more spending
Consumer confidence Expectations about the future influence spending
Personal taxes Higher taxes reduce spending
Savings rate More saving reduces spending
2. Investment (I):
Factor Description
Interest rate Lower rates increase investment
Profit expectation Higher expected return increases investment
Availability of finance Easier access to credit boosts investment
3. Government Spending (G):
Factor Description
Availability of funds Dependent on foreign aid, taxes, borrowings
Political trends Spending changes with political goals
4. Net Exports (X − M):
Factor Description
Foreign income Higher foreign income boosts exports
Exchange rates Favorable rates boost exports and reduce imports
Trade barriers Tariffs/taxes affect imports and exports
3
CHAPTER 05
MACROECONOMICS
LO # LEARNING OBJECTIVE
PART A– MACROECONOMICS
LO 1 AMIS/OBJECTIVE OF MACROECNOMIC POLICIES
LO 2 GDP AND ITS CALCULATION
LO 3 FACTORS AFFECTING DETERMINATION OF GDP
LO 4 AGGREGATE DEMAND (AD) AND SHIFT IN AD CURVE
LO 5 AGGREGATE SUPPLY (AS) AND SHIFT IN AS CURVE
LO 6 BUSINESS CYCLE AND ITS INDICATORS
PART B– MACROECONOMIC AIMS/OBJECTIVES
LO 7 ECONOMIC GROWTH
LO 8 INFLATION
LO 9 UNEMPLOYEMENT
PART C– MACROECONOMIC POLICIES
LO 10 BUDGET SURPLUS AND DEFICIT
LO 11 TAXATION
LO 12 MONETARY POLICY
LO 13 SUPPLY-SIDE POLICY
LO 14 BALANCE OF PAYMENTS AND FREE TRADE
1
,Business and Technology – Study Notes Chapter 05: Macroeconomics
Introduction to Macroeconomics
Definition:
Macro means large. Macroeconomics deals with overall performance of the economy(economy as a
whole, usually at the national level.).
Governments want to improve their national economy. They use macroeconomic policies to do this
LO 1: AMIS/OBJECTIVE OF MACROECNOMIC POLICIES:
1. Real gross domestic product (GDP) growth:
Economic growth means an increase in GDP (Increase in the economy’s real output) of a nation over
time. This will increase the wealth of the country and standard of living of people.
2. Controlled inflation / Price stability: (or low inflation)
Government ensures there is no or low inflation ensuring stability in prices and exchange rates.
3. Full employment: (or low unemployment)
Government has social objective to achieve full employment level:
to ensure maximum utilization of human resources and increase national output, and
to reduce crimes, or social security payments as a result of unemployment.
Supporting Aims
Governments may also set supporting aims for specific areas of the economy:
1. Control prices of essential goods and services
2. Attract foreign investment
3. Maintain a favourable balance of payments (exports vs imports)
4. Encourage producers to move up the value chain
5. Improve economic capacity and infrastructure (supply-side focus)
6. Manage the local currency’s foreign exchange rate
LO 2: GDP AND ITS CALCULATION:
Gross Domestic Product (GDP) or National Income:
“GDP is the aggregate market value of all goods and services produced within boundaries of a
country in a given period.”
Calculation of GDP:
GDP is calculated by adding up the following components:
1. Consumption (C): Local spending on goods and services. e.g. local travel, rent, energy.
2. Investment (I): Business spending on assets. e.g. Machinery, premises, production systems.
3. Government Spending (G): Government’s expenses. e.g. public services, direct investment,
goods and services.
4. Net Exports (X – M): Exports minus imports. e.g. Trade goods, cross-border services.
2
, Business and Technology – Study Notes Chapter 05: Macroeconomics
Study Tip – Gross National Product (GNP)
Gross National Product (GNP) is similar to GDP, with the addition of international cash flows. It measures the
total economic output of a country’s residents.
GNP = GDP + Income from abroad − Income paid abroad
1. GNP includes international cash flows, while GDP does not.
2. A high GNP (relative to GDP) may result from large remittance inflows.
LO 3: FACTORS AFFECTING DETERMINATION OF GDP:
1. Consumption (C):
Factor Description
Consumer wealth More income or credit → more spending
Consumer confidence Expectations about the future influence spending
Personal taxes Higher taxes reduce spending
Savings rate More saving reduces spending
2. Investment (I):
Factor Description
Interest rate Lower rates increase investment
Profit expectation Higher expected return increases investment
Availability of finance Easier access to credit boosts investment
3. Government Spending (G):
Factor Description
Availability of funds Dependent on foreign aid, taxes, borrowings
Political trends Spending changes with political goals
4. Net Exports (X − M):
Factor Description
Foreign income Higher foreign income boosts exports
Exchange rates Favorable rates boost exports and reduce imports
Trade barriers Tariffs/taxes affect imports and exports
3
