Econs - Paper 2 (Macro)
Macroeconomics 1: Understanding the economy
Economic agents and their roles in the economy
Economic agents: A group or individuals within the economy who make decisions that
in uence outcomes
1. Households/consumers: Individuals and families who purchase goods and
services from producers
- Objective: Lower prices
2. Producers: Firms who transform factors of production into goods and services for
consumers
- Objective: Pro t maximisation
3. Government: The economic agent that provides and enforces rules on how
consumers and rms interact
- Objective: Higher government revenue
4. Workers: Individuals who supply physical and mental e orts to rms
- Objective: Higher wages
Circular ow of income: A model of the economy that shows the movement of goods
and services between households and rms and their corresponding payment in
money terms
• In a closed system, the ows must balance, hence Total income = Total output =
Total expenditure
• In an open economy, it is possible to have extra income ‘injected’ or income
‘leaked.’
- Withdrawals: Where money ows out of the circular ow
Eg. Taxes, imports savings
- Injections: Where money ows in to the circular ow
Eg. Government spending, exports, investment by rms
Economic growth
- GDP: Total value of all nal goods and services in an economy over a speci c
period of time
- Nominal GDP: GDP calculated using current prices. Not adjusted for in ation
- Real GDP: GDP adjusted for in ation. Real GDP = Nominal GDP / De ator (Rate of
change in price index)
- GDP per capita: GDP / Population
1
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, - Gross national product (GNP): It is the total value of nal goods and services
produced by the people of a country domestically and abroad over a speci c period
of time
- National income: The ow of new output produced by an economy in a particular
time period
GDP includes:
1. Consumer spending
2. Government spending
3. Investment/spending from rms
4. Exports - imports
E ects on increase in GDP:
- Increase in living standards
- Lower poverty
- Higher incomes
- Higher employment
- More goods and services produced in the economy
Problems with using GDP to compare living standards:
- Ignores income distribution
- Informal sector is not included
- International comparison can be distorted due to exchange rates di erences or
di erences in cost of living
- Doesn’t take into account other factors like health and education
- Doesn’t take into account production of harmful goods
Purchasing power parity (PPP) - GDP per capita gas been adjusted to re ect cost of
living in di erent countries
Alternatives to GDP:
1. Gross national income (GNI):
- GDP + remittances (Cash received from abroad not for goods and services
2. Gross national happiness (GNH)
- Easterlin paradox: The hypothesis that happiness increases with a average
incomes, but only till a certain point
Economic growth: Increase in the real GDP over a speci c period of time
- Economic growth = Rate of change in real GDP
Potential economic growth: An expansion in the productive capacity of the economy
2
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,Causes of economic growth:
1. Discovery of more natural resources
2. Investment in capital and infrastructure
3. Increasing quantity and quality of labour
4. Technological advancements
5. Reallocating resources from less productive to more productive uses
Advantages of Economic growth:
1. Increase employment
2. Higher standard of living
3. Higher tax revenue
4. Government has to spend less of unemployment bene ts
5. Higher investments in research and development
6. Human development indicators might improve
7. Social problems may be solved
Disadvantages of Economic growth:
1. Can cause in ation as AD increases at a faster rate than AS
2. Can interfere with other Macroeconomic objectives, like balance of payments
3. Unsustainable growth can harm environment and cause loss of biodiversity
4. Can cause national debt if governments increase spending a lot
5. Increase income inequality (rich get richer, poorer are usually una ected)
Policies to promote economic growth:
1. Demand Side policies – Expansionary scal and monetary policy to increase AD.
If not controlled, it can lead to high in ation and recession
2. Supply side polices – Can be used depending on nature of problem. Can take a
lot of time to take e ect, and will not be useful during recession, as problems lies
in lack of demand.
Trade cycle: A phenomenon where the GDP uctuates around its underlying trend,
following a regular pattern
Seasonal adjustment: A process by which season uctuations in a variable are
smoothed to reveal the underlying trend
Unemployment
• Employment: People in the working age group (16-25) in paid work
• Unemployment: Situation where people in the working age who are willing and able
to work are unable to nd work for 2 weeks or more
• Economically inactive: People who are of working age who are neither employed or
unemployed
3
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, • Labour force: Employed people + Unemployed people
• Unemployment rate: Unemployed / Labour force * 100
• Discouraged workers: People who have been unable to nd employment and now
are no loner looking for work
Methods to measure unemployment:
1. Labour force survey: 80,000 people are asked if they are unemployed
Advantages:
- More accurate that claimant count. Includes those that are unemployed but cannot
claim bene ts
- Allows international comparisons
Disadvantages:
- Expensive to collect the information
- Subject to statistical error due to sample bias
2. Claimant count: A measure of the number of people claiming unemployment
bene t
Advantages:
- Quick
- Cheap
Disadvantages:
- Less accurate
- Some unemployed may not claim bene ts
- Doesn’t allow for international comparisons
Types of unemployment:
1. Cyclical Unemployment – Unemployment caused due to a fall in AD, during a
recession.
2. Structural Unemployment – Unemployment that occurs due to the long-term
change in the structure of the economy. People have undesired skills, so remain
unemployed.
3. Seasonal Unemployment – Caused due the demand for a good only being there
in a certain time of the year
4. Frictional Unemployment – Unemployment caused when a person leaves their job
and spends time looking for another job.
5. Real wage unemployment – Market wage is above market clearing rate
- When wage rate is higher than equilibrium wage rate, the supply of labour is greater
than the demand, which causes unemployment
- Voluntary unemployment: Situation arising when an individual chooses not to
accept a job at the going wage rate
4
fi fi fi fi
Macroeconomics 1: Understanding the economy
Economic agents and their roles in the economy
Economic agents: A group or individuals within the economy who make decisions that
in uence outcomes
1. Households/consumers: Individuals and families who purchase goods and
services from producers
- Objective: Lower prices
2. Producers: Firms who transform factors of production into goods and services for
consumers
- Objective: Pro t maximisation
3. Government: The economic agent that provides and enforces rules on how
consumers and rms interact
- Objective: Higher government revenue
4. Workers: Individuals who supply physical and mental e orts to rms
- Objective: Higher wages
Circular ow of income: A model of the economy that shows the movement of goods
and services between households and rms and their corresponding payment in
money terms
• In a closed system, the ows must balance, hence Total income = Total output =
Total expenditure
• In an open economy, it is possible to have extra income ‘injected’ or income
‘leaked.’
- Withdrawals: Where money ows out of the circular ow
Eg. Taxes, imports savings
- Injections: Where money ows in to the circular ow
Eg. Government spending, exports, investment by rms
Economic growth
- GDP: Total value of all nal goods and services in an economy over a speci c
period of time
- Nominal GDP: GDP calculated using current prices. Not adjusted for in ation
- Real GDP: GDP adjusted for in ation. Real GDP = Nominal GDP / De ator (Rate of
change in price index)
- GDP per capita: GDP / Population
1
fl fl fi fi fifl fl fl fl fi fl fifl ff fi fl fl fi
, - Gross national product (GNP): It is the total value of nal goods and services
produced by the people of a country domestically and abroad over a speci c period
of time
- National income: The ow of new output produced by an economy in a particular
time period
GDP includes:
1. Consumer spending
2. Government spending
3. Investment/spending from rms
4. Exports - imports
E ects on increase in GDP:
- Increase in living standards
- Lower poverty
- Higher incomes
- Higher employment
- More goods and services produced in the economy
Problems with using GDP to compare living standards:
- Ignores income distribution
- Informal sector is not included
- International comparison can be distorted due to exchange rates di erences or
di erences in cost of living
- Doesn’t take into account other factors like health and education
- Doesn’t take into account production of harmful goods
Purchasing power parity (PPP) - GDP per capita gas been adjusted to re ect cost of
living in di erent countries
Alternatives to GDP:
1. Gross national income (GNI):
- GDP + remittances (Cash received from abroad not for goods and services
2. Gross national happiness (GNH)
- Easterlin paradox: The hypothesis that happiness increases with a average
incomes, but only till a certain point
Economic growth: Increase in the real GDP over a speci c period of time
- Economic growth = Rate of change in real GDP
Potential economic growth: An expansion in the productive capacity of the economy
2
ffff ff fl fi fi fi ff fl fi
,Causes of economic growth:
1. Discovery of more natural resources
2. Investment in capital and infrastructure
3. Increasing quantity and quality of labour
4. Technological advancements
5. Reallocating resources from less productive to more productive uses
Advantages of Economic growth:
1. Increase employment
2. Higher standard of living
3. Higher tax revenue
4. Government has to spend less of unemployment bene ts
5. Higher investments in research and development
6. Human development indicators might improve
7. Social problems may be solved
Disadvantages of Economic growth:
1. Can cause in ation as AD increases at a faster rate than AS
2. Can interfere with other Macroeconomic objectives, like balance of payments
3. Unsustainable growth can harm environment and cause loss of biodiversity
4. Can cause national debt if governments increase spending a lot
5. Increase income inequality (rich get richer, poorer are usually una ected)
Policies to promote economic growth:
1. Demand Side policies – Expansionary scal and monetary policy to increase AD.
If not controlled, it can lead to high in ation and recession
2. Supply side polices – Can be used depending on nature of problem. Can take a
lot of time to take e ect, and will not be useful during recession, as problems lies
in lack of demand.
Trade cycle: A phenomenon where the GDP uctuates around its underlying trend,
following a regular pattern
Seasonal adjustment: A process by which season uctuations in a variable are
smoothed to reveal the underlying trend
Unemployment
• Employment: People in the working age group (16-25) in paid work
• Unemployment: Situation where people in the working age who are willing and able
to work are unable to nd work for 2 weeks or more
• Economically inactive: People who are of working age who are neither employed or
unemployed
3
fl ff fi flfi fl fl fi ff
, • Labour force: Employed people + Unemployed people
• Unemployment rate: Unemployed / Labour force * 100
• Discouraged workers: People who have been unable to nd employment and now
are no loner looking for work
Methods to measure unemployment:
1. Labour force survey: 80,000 people are asked if they are unemployed
Advantages:
- More accurate that claimant count. Includes those that are unemployed but cannot
claim bene ts
- Allows international comparisons
Disadvantages:
- Expensive to collect the information
- Subject to statistical error due to sample bias
2. Claimant count: A measure of the number of people claiming unemployment
bene t
Advantages:
- Quick
- Cheap
Disadvantages:
- Less accurate
- Some unemployed may not claim bene ts
- Doesn’t allow for international comparisons
Types of unemployment:
1. Cyclical Unemployment – Unemployment caused due to a fall in AD, during a
recession.
2. Structural Unemployment – Unemployment that occurs due to the long-term
change in the structure of the economy. People have undesired skills, so remain
unemployed.
3. Seasonal Unemployment – Caused due the demand for a good only being there
in a certain time of the year
4. Frictional Unemployment – Unemployment caused when a person leaves their job
and spends time looking for another job.
5. Real wage unemployment – Market wage is above market clearing rate
- When wage rate is higher than equilibrium wage rate, the supply of labour is greater
than the demand, which causes unemployment
- Voluntary unemployment: Situation arising when an individual chooses not to
accept a job at the going wage rate
4
fi fi fi fi
