MACROECONOMICS UNIT 2

UNIT 2 MACROECNOMICS: THE NATIONAL ECONOMY

CONTENT:

• measurement of macroeconomic performance
• how the macroeconomy works
• aggregate demand and aggregate supply
• macroeconomic policy objectives
• economic growth and economic cycle
• inflation, deflation, employment and unemployment
• balance of payments on the current account
• monetary policy
• fiscal policy
• supply side policies

MEASUREMENT OF MACROECONOMIC PERFORMANCE

Macroeconomics considers the economy as a whole- the total quantities of good and services produced by firms in an economy. Aggregate demand is the total demand in the economy made up of consumption, investment, government expenditure and net exports C + I + G + (X-M); whilst Aggregate supply is the total value of goods and services supplied in the economy.

Performance of the macro economy is outline by:

• economic growth- is our capacity to produce goods and services growing over time?
• Full employment- efficient or idle resources?
• Stable prices- are we able to control prices so that we are competitive with other economies?
• current account- are we buying more from abroad than we are selling abroad?

Policy of any government is to improve the well-being (economic welfare) of the people by macroeconomic policies. 

GROWTH- economic growth is the capacity of the economy to produce more goods and services over time. It is measured by looking at the change in the level of output. 

draw graph to show trend growth and actual growth below

GDP is a standard measurement of output. It is measured as a percentage and stands for Gross Domestic product (the total value of goods and services produced in an economy). The actual growth displays the cyclical activity of the economy where we can be above or below trend. A negative output gap is where the economy is producing less than trend whilst a positive output gap is when actual GDP exceeds trend causing inflationary pressure, otherwise known as a recovery or boom; inflationnary pressure will reduce AD. A negative output gap also resembles a recession. 

These can lead to a conflict in macroeconomic policies and as a result there will be a trade off (where on macroeconomic objective has to be curtailed to favour another objective) For example: increasing growth conflicts with price stability if AD exceeds AS. In this positive output gap unemployment will be low and wages rising causing greater costs for producers being passed onto consumers- domestic inflation will also cause UK international competitiveness to fall (imports likely to increase whilst exports decrease)

EMPLOYMENT AND UNEMPLOYMENT

This is measured as a % of workforce i.e. those looking for work but not employed compared to total working and non working. When high unemployment, there is a waste of resources and the economy cannot be working at full efficiency or potential. Unemployment occurs in a negative output gap. High opportunity cost as waste scarce resources- effects economy widely:

• hurts individuals confidence and level of income, greater problems may occur such depression alcoholism etc... leading to economic consequences of gov expenditure therefore there is an opportunity cost.
• standard of living falls, and personal or household…