Entire Macro (unit 2 F582 the national and international economy ) revision notes

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Macro economics revision notes
The macro economic objectives are the main performance measurements of an economy.
Objective Government aim
Economic growth Steady positive growth
Unemployment Low and steady economic growth
Inflation 2% steady inflation
Balance of payment Steady Balance of payments
Exchange rates Steady exchange rates.
There are two ways to measure economic growth in the short term using GDP. GDP or gross
domestic product is the total value of goods and services produced in an economy within a year.
Nominal GDP measures the value unadjusted for inflation while real GDP takes this into account to
gives a more accurate figure. It is calculated by multiplying nominal GDP by a base price and then
dividing by the current figure.
Economic growth stability is promoted by government as a way of avoiding financial crisis and large
swings. The economic cycle has traditionally gone from boom periods of large growth (2.5%+)
through slowdowns and recessions of negative growth and then recovering. Stability would mean
slower growth and no slowdowns/recessions. Stability is important as it avoids uncertainty that
makes future planning difficult and can discourage firms from making major changes.
Economic growth is the long term expansion in productive potential in an economy and should lead to
higher employment and living standards.
Benefits Costs
Better standards of living Leads to demand pull inflation because
reduced unemployment of more spending
Increased life expectancy through Cost push inflation because of more
better healthcare workers
Increased spending on merit goods Negative externalities such as more
Increased profits pollution
Could correct balance of payments Higher unemployment if new technology
deficit is used
Increase relative poverty- Rich getting
richer
More demand for imports.
If it is sustainable growth is usually good for an economy and is better in the long run than in the short
run as many costs are only short term. It can also lead to more efficiency and better use of factors of
production.
The inflation rate measures the rise in the general price level over a year expressed as a percentage.
It is the rise in prices and fall in the value of money. Inflation is calculated using RPI and CPI. These take
a "basket" of ordinary goods and track the price changes. This basket is weighted on the regularity

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So bread is weighted more than a house. CPI excludes housing related
costs as these fluctuate and so is preferred by government as it is more accurate. Governments can
attempt to manipulate inflation through adjusting interest rates at the bank of England.
There are two types of inflation, demand pull and cost push. Demand pull happens during boom times
in economies when demand increases faster than supply and firms increase prices so as to maximise
profits.…read more

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Unemployment is made worse with the longer the unemployment, the amount of unemployment ,
whether the benefit system discourages work and the type and distribution of unemployment e.g.
structural unemployment or a shortage of jobs in the south/ an abundance in the north.
Unemployment has benefits as well as costs, these include up skilling (New training/ career change
while unemployed) and increased entrepreneur activity affecting individuals and lower inflation,
more skilled work force and increase in new businesses affecting the whole economy.…read more

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Lower costs for producer- cheaper to place in other countries meaning they
import raw materials to convert into benefit from the growth
finished products. if exports fall then business and capital
Lower inflation- Suppliers face confidence will also fall negatively
international competition and so will cut affecting the aggregate demand in the
costs and prices so not to loss sales economy.…read more

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The aggregate demand curve slopes downward like a normal demand curve as the lower the price
level the more that can be purchased contributing to real GDP. Any constituent of AD that shifts will
also shift the AD curve.
Aggregate supply is the total level of planned output in the whole economy at any given price rate.
There are two types short run and long run. Short run is where the factors of production are fixed
and so wage rates and technology as assumed stable.…read more

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Government economic policy can be split into 3 branches
Monetary- Government regulation of currency and inflation through central banks
Fiscal- Government spending policies that affect AD.
Supply side- policies looking to shift LRAS and increase the overall output.
There are 4 types of fiscal policy ;
Discretionary- Deliberate manipulation of government spending to influence AD counter
cyclically
Automatic stabilisers- Forms of spending and taxation that automatically change to offset the
effects of fluctuations in the economy. E.g.…read more

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Exchange rates- Floating exchange rates cannot be manipulated as they are based on
demand and supply of the currency.
Money supply- This is measured by looking at narrow money (cash in circulation) and broad
money(including deposits). In theory increasing these can signal AD to rise. Changes to these
are usually as last resort as they devalue currency. Quantative easing is the name for
increasing money supply.…read more

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International trade makes up 25% of AD through net exports (exports - imports) Britain has an open
economy and relies on trade with other countries. Britain's trade deficit is because of better
products abroad, strong pound fewer UK raw materials and high UK inflation.…read more

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Advantages Disadvantages
Free access to common markets More competition could mean UK firms
Access to the most appropriate factors go out of business
of production Social charter ambiguous
large export market harder to sell outside Europe
protection from non European markets investment may go to only the
Increased competition leading to lower prosperous areas and not the over
prices areas. Unemployment may rise in non
prosperous areas.
The Euro is the single curerency for the EU to help trade.…read more

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