AS Macroeconomics
AQA
“The measurement of macroeconomic
performance”
The government aims to achieve several key macroeconomic objectives, often
referred to as the "macroeconomic aims" or "policy objectives." These objectives
are interconnected and influence one another. The main objectives are:
1. Economic Growth: Sustained increase in real GDP over time, leading to
higher living standards.
2. Low Unemployment: Reducing the number of people who are actively
seeking work but unable to find employment.
3. Price Stability (Low Inflation): Keeping inflation at a stable, low level, often
around a 2% target (in the UK).
4. Balance of Payments Stability: Ensuring a sustainable relationship
between exports and imports to avoid large deficits or surpluses.
5. Environmental Sustainability: Achieving growth that does not degrade
natural resources or harm future generations.
These objectives are interlinked. For example, strong economic growth can
reduce unemployment as firms demand more labour. However, rapid growth may
,lead to inflationary pressures, presenting a conflict between growth and price
stability. Similarly, measures to improve the balance of payments (like reducing
imports) could restrict growth. The government's role is to balance these trade-
offs.
To track performance relative to the objectives, governments use macroeconomic
indicators. These indicators provide quantitative data that inform policy decisions.
Key indicators include:
1. GDP (Gross Domestic Product): Measures the total value of goods and
services produced in an economy, used to track economic growth. It can be
measured in real terms (adjusted for inflation) or nominal terms (not
adjusted for inflation).
2. Unemployment Rate: Percentage of the labour force that is unemployed
but actively seeking work. It reveals the economy's capacity to create jobs.
3. Inflation Rate (CPI/RPI): Consumer Price Index (CPI) and Retail Price Index
(RPI) track changes in the average price level of goods and services over
time, measuring inflation.
4. Balance of Payments (BoP) on Current Account: Records the value of
exports and imports of goods, services, income, and transfers, indicating
the extent to which the UK is a net borrower or lender in the global
economy.
Interconnections:
• Inflation vs. Unemployment: The Phillips Curve suggests an inverse
relationship — reducing unemployment may lead to higher inflation.
• GDP and Balance of Payments: Higher GDP often increases imports,
worsening the current account deficit.
• Inflation and Balance of Payments: High domestic inflation makes exports
less competitive, worsening the trade balance.
By monitoring these indicators, policymakers can assess how well the economy is
achieving its objectives. If inflation rises, central banks may raise interest rates to
reduce demand and control prices, but this could reduce GDP growth and
increase unemployment.
Index numbers simplify the analysis of changes in economic variables over time,
allowing for easy comparison of data across periods. They are used to measure
changes in prices, output, and other key indicators.
, 1. Consumer Price Index (CPI): A price index that tracks the cost of a
"basket" of consumer goods and services over time, with a base year value
of 100. If the CPI rises to 105, it indicates a 5% increase in the price level.
2. GDP Deflator: Measures inflation in the wider economy, calculated as
(Nominal GDP / Real GDP) × 100.
3. Index of Production (IOP): Tracks changes in the volume of output across
industries, often used to assess sectoral growth.
Interconnections:
• Index numbers like CPI are crucial for measuring inflation, one of the key
macroeconomic objectives.
• Real GDP is calculated using index numbers (deflation of nominal GDP),
directly linking it to the objective of growth.
• The BoP can be affected by price changes in global markets, so index
numbers can be used to assess terms of trade.
Bigger Picture
The measurement of macroeconomic performance is central to effective economic
policy. By tracking key objectives and using indicators such as GDP,
unemployment, and inflation, policymakers can identify trends, anticipate
problems, and implement targeted interventions. The interdependence of
objectives means that achieving one goal often comes at the cost of another.
Index numbers play a critical role in simplifying the presentation and analysis of
data, making it easier for policymakers, economists, and the public to understand
the economy's trajectory.
“How the macroeconomy works”
The Circular Flow of Income
The circular flow of income explains how money moves within an economy and
highlights the interdependence between economic agents: households, firms, the
government, and the external sector.
1. Two-Sector Model (Basic Flow):
AQA
“The measurement of macroeconomic
performance”
The government aims to achieve several key macroeconomic objectives, often
referred to as the "macroeconomic aims" or "policy objectives." These objectives
are interconnected and influence one another. The main objectives are:
1. Economic Growth: Sustained increase in real GDP over time, leading to
higher living standards.
2. Low Unemployment: Reducing the number of people who are actively
seeking work but unable to find employment.
3. Price Stability (Low Inflation): Keeping inflation at a stable, low level, often
around a 2% target (in the UK).
4. Balance of Payments Stability: Ensuring a sustainable relationship
between exports and imports to avoid large deficits or surpluses.
5. Environmental Sustainability: Achieving growth that does not degrade
natural resources or harm future generations.
These objectives are interlinked. For example, strong economic growth can
reduce unemployment as firms demand more labour. However, rapid growth may
,lead to inflationary pressures, presenting a conflict between growth and price
stability. Similarly, measures to improve the balance of payments (like reducing
imports) could restrict growth. The government's role is to balance these trade-
offs.
To track performance relative to the objectives, governments use macroeconomic
indicators. These indicators provide quantitative data that inform policy decisions.
Key indicators include:
1. GDP (Gross Domestic Product): Measures the total value of goods and
services produced in an economy, used to track economic growth. It can be
measured in real terms (adjusted for inflation) or nominal terms (not
adjusted for inflation).
2. Unemployment Rate: Percentage of the labour force that is unemployed
but actively seeking work. It reveals the economy's capacity to create jobs.
3. Inflation Rate (CPI/RPI): Consumer Price Index (CPI) and Retail Price Index
(RPI) track changes in the average price level of goods and services over
time, measuring inflation.
4. Balance of Payments (BoP) on Current Account: Records the value of
exports and imports of goods, services, income, and transfers, indicating
the extent to which the UK is a net borrower or lender in the global
economy.
Interconnections:
• Inflation vs. Unemployment: The Phillips Curve suggests an inverse
relationship — reducing unemployment may lead to higher inflation.
• GDP and Balance of Payments: Higher GDP often increases imports,
worsening the current account deficit.
• Inflation and Balance of Payments: High domestic inflation makes exports
less competitive, worsening the trade balance.
By monitoring these indicators, policymakers can assess how well the economy is
achieving its objectives. If inflation rises, central banks may raise interest rates to
reduce demand and control prices, but this could reduce GDP growth and
increase unemployment.
Index numbers simplify the analysis of changes in economic variables over time,
allowing for easy comparison of data across periods. They are used to measure
changes in prices, output, and other key indicators.
, 1. Consumer Price Index (CPI): A price index that tracks the cost of a
"basket" of consumer goods and services over time, with a base year value
of 100. If the CPI rises to 105, it indicates a 5% increase in the price level.
2. GDP Deflator: Measures inflation in the wider economy, calculated as
(Nominal GDP / Real GDP) × 100.
3. Index of Production (IOP): Tracks changes in the volume of output across
industries, often used to assess sectoral growth.
Interconnections:
• Index numbers like CPI are crucial for measuring inflation, one of the key
macroeconomic objectives.
• Real GDP is calculated using index numbers (deflation of nominal GDP),
directly linking it to the objective of growth.
• The BoP can be affected by price changes in global markets, so index
numbers can be used to assess terms of trade.
Bigger Picture
The measurement of macroeconomic performance is central to effective economic
policy. By tracking key objectives and using indicators such as GDP,
unemployment, and inflation, policymakers can identify trends, anticipate
problems, and implement targeted interventions. The interdependence of
objectives means that achieving one goal often comes at the cost of another.
Index numbers play a critical role in simplifying the presentation and analysis of
data, making it easier for policymakers, economists, and the public to understand
the economy's trajectory.
“How the macroeconomy works”
The Circular Flow of Income
The circular flow of income explains how money moves within an economy and
highlights the interdependence between economic agents: households, firms, the
government, and the external sector.
1. Two-Sector Model (Basic Flow):
