Macro Introduction

  • The measurement of macroeconomic performance
  • How the macroeconomy works
  • Economic performance
  • Macroeconomic policy

Macroeconomic performance

Economic indicators - provide information on how well or badly the economy is peforming in terms of achieving desired targets or goals. such as:

  • economic growth
  • higher living standards
  • full employment
  • control of inflation

These and other targets such as satisfactory balance of payments, form the policy objectvies that governments wish to achieve.

Policy instraments such as:

  • Monetary policy
  • Fiscal policy

Help assess the macroeconomic performance and whether they are achieving their goals
Economic indicators are also used to compare the UK economy against other economies

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How the macro economy works

AD/AS analysis
- total expenditure upon national output that all the economic agents in the economy wish to undertake

  • Consumption by households
  • investment spending by firms
  • government spending
  • net amount spent on the economy's output by the rest of the world (spending on exports minus spending by UK residents on imports)

AS- total output of goods and services which all the firms or producers in the economy wish to supply or sell.
The availability and quality of the factors of production determine AS.
Also determined by the impact of institutional and cultural factors

LRAS - determined by the economy's ability to produce is the level of output the economy produces on it's PPF.

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How the macroeconomy works - the circular flow

  • maps the flows of income
  • output
  • spending around the economy
  • shows macroecnomic equilibrium

Macroeconomic equilibrium occurs when planned injections of spending into the flow of income and spending circulating round the economy exactly equal planned withdrawals or leakages of spending ou of the flow.

planned injections = planned withdrawals

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Economic performance

The performance of the national economy can be measured by the extent to which the government's macroeconomic policy objectives have been achieved and can continue to be achieved in the future.


4 Objectives

  • full employment (internal)
  • economic growth and higher living standards (internal)
  • control of inflation (internal)
  • a satisfactory balance of payments (external)

External - involves the UK relations with the rest of the world

HOWEVER - the government is faced with policy conflicts - trade-offs

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Macroeconomic policy

Fiscal policy

  • taxation and government spending
  • governments budget deficit or surplus
  • Maintaining macroeconomic stability

Monetary policy

  • Raising or lowering interest rates primarily to manage AD in pursuit of of the objective of controlling inflation
  • May affect the money supply and the exchange rate
  • Role of the Bank of England in implementing it

Supply-side policies

  • Free market and anti-interventionist and increase the economy's production potential by improving competition and the efficiency of markets and resource allocation
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