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AS/A Level Economics 9708
Unit 4: Theory and Measurement in the Macroeconomy
Recommended Prior Knowledge
This Unit builds on the material covered in Unit 5, Measurement in the Macroeconomy, in the Core curriculum.
Context
The material focuses on theory and measurement in the macroeconomy and then leads on in Unit 5 to the various macroeconomic problems and the different policies
that can be adopted to try and overcome these problems.
Outline
The Unit begins by looking at the use of national income statistics and then goes on to consider different definitions of the money supply and the concept of the circular
flow of income. It then considers the Keynesian and monetarist schools of thought on the economy and goes on to examine the aggregate expenditure function and
aggregate demand and supply. Finally, it looks at the sources of money in an economy, the relationship between the money supply, the price level and output and the
determination of interest rates.
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Learning outcomes
a
Candidates should have an
understanding of national income
statistics and there are four areas to
focus on:
Suggested Teaching activities
Learning resources
Tutor2u: Measuring National Income
Bized: Economic Growth
Bized: GDP and Standard of Living
Bamford, Chapter 11, pp 201-209
Anderton, Unit 25, pp 156-163
Gillespie, pp 52-53
i.
The use of national income
statistics as measures of
economic growth and living
standards
Students need to have a good understanding of the various terms; the
first self-assessment task in Bamford (page 203) and question 2 in
Anderton (page 157) are useful.
ii.
Money and real data; the GDP
deflator
Students need to be aware of the possible impact of inflation on the
value of money so that they are able to distinguish between the nominal
and real value of an amount of money; they should find out the current
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Learning outcomes
Suggested Teaching activities
Learning resources
rate of inflation in their own country and discuss the potential impact of
this on the value of money.
The second self-assessment task in Bamford (page 203) is useful on the
distinction between nominal and real values.
iii.
iv.
b
c
The comparison of economic
growth rates and living standards
over time and between countries
Other indicators of living
standards and economic
development
Students need to research these comparisons in their own country over
a period of time and between various countries today. The case study in
Stanlake (page 257) is a good example of a comparison over time.
The table in Bamford (page 204) and the data in Anderton (pages 162163) are good on the comparison between countries.
Bized: GDP and International
Comparisons
Imf: Country Information
Stanlake, Chapter 26, pp 250-258
Students should consider just how difficult it is to measure living
standards; they should work in groups and discuss all the factors that
would need to be taken into account before reporting back to the class
Bamford (page 209) has some interesting data using the Human
Development Index
Bized: Measuring Poverty and Living
Standards
Candidates should understand the
meaning of the term money supply and
be able to distinguish between broad
and narrow definitions of the money
supply.
Students need to appreciate the idea of different forms of money and of
a liquidity spectrum; they should consider exactly what is meant by
money in different circumstances and try and rank these in terms of
liquidity.
Gillespie (page 68) has a very good explanation of the different
measures of the money supply.
Tutor2u: Measuring the Money Supply
Bamford, Chapter 11, pp 209-211
Anderton, Unit 36, pp 234-240
Anderton, Unit 82, pp 552-557
Stanlake, Chapter 7, pp 55
Stanlake, Chapter 33, pp 304-316
Gillespie, pages 64and 68
They should also have an
understanding of government
accounts, including the government
budget and deficit financing.
Students should try and find information on the government accounts in
their own country and analyse these.
The data question in Anderton on Preparing a Budget (pages 239-240)
and the self-assessment task on a budget deficit in Bamford (page 211)
are very useful.
Candidates should understand the
concept of the circular flow of income
Students need to have a clear understanding of this concept; the
diagrams in Bamford (page 212), Anderton (page 156), Stanlake (pages
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Bized: The Circular Flow of Income
Tutor2u: The Circular Flow of Income
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Learning outcomes
Suggested Teaching activities
Learning resources
between households, firms,
government and the international
economy.
248-250) and Gillespie (page 54) are all very helpful.
They should discuss the concept, recognising the importance of the link
between income and expenditure.
and Spending
S-cool: The Circular Flow of Income
Bamford, Chapter 11, pp 212
Anderton, Unit 25, pp 156-157
Stanlake, Chapter 26, pp 248-250
Gillespie, p 54
d
Candidates should understand the
differences between the Keynesian
and monetarist schools of thought on
how the macroeconomy functions.
Students should research the key features of the two approaches and
the background to the development of these theories and then give a
presentation on their findings, evaluating the strengths and weaknesses
of each; it might also be a suitable topic for a debate, comparing and
contrasting the two schools of thought.
There are useful summaries of the two approaches in Bamford (page
212) and Gillespie (page 87).
Bized: Introduction to Keynesians
Bized: Introduction to Monetarists
S-cool: Do Keynesians and Monetarists
Agree?
Bamford, Chapter 11, p 212
Stanlake, Chapter 25, pp 240-242
Gillespie, p 87
e
Candidates should understand the
meaning of the aggregate expenditure
function (AE), its components and their
determinants
Students need to have a good understanding of the necessary
diagrams; Bamford (pages 215-218) and Gillespie (pages 84-86) are
very helpful.
The self-assessment tasks on the Singapore economy in Bamford (page
214) and the data response questions in Stanlake (page 282) are both
useful.
S-cool: The 45 Degree Diagram
Bized: Consumption, Investment and
Growth
Tutor2u: Household Savings
Behaviour
Tutor2u: Inflationary Gaps
Tutor2u: Investment
Bamford, Chapter 11, pp 212-219
Anderton, Units 35 and 36, pp 227-235
Stanlake, Chapter 27, pp 259-264
Stanlake, Chapter 29, pp 279-283
Stanlake, Chapter 52, pp 503-511
Gillespie, pp 60-62 and 84-86
Candidates should also understand
the concept of income determination
using the AE-income and the
withdrawal/injection approaches.
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Learning resources
Candidates should also understand
the concepts of the multiplier and the
accelerator and be able to distinguish
between autonomous and induced
investment.
Students need to have a good grasp of how the multiplier works; the
self-assessment task in Bamford (page 218), question 3 in Anderton
(page 215) and the examples in Stanlake (pages 503-505) are all very
useful. The accelerator also needs to be understood; question 4 in
Anderton (page 208) and question 3 in Anderton (page 522) are helpful.
Bized: The Multiplier Principle
Turor2u: The National Income Multiplier
Anderton, Unit 33, pp 214-215
f
Candidates should understand the
shape and determinants of aggregate
demand (AD) and aggregate supply
(AS)
They should also understand the
significance of the interaction of AD
and AS in terms of the determination of
levels of output, prices and
employment.
Students need to have a good grasp of the diagrams; these are covered
well in Bamford (pages 219-222) and Gillespie (pages 81-83)
The self-assessment tasks in Bamford (pages 221 and 222) and the
data question in Anderton (page 226) are very helpful.
S-cool: Aggregate Demand
S-cool: Aggregate Supply
Tutor2u: Aggregate Demand and
Aggregate Supply
Bized: The AD and AS Model
Bamford, Chapter 11, pp 219-222
Anderton, Units 33-35, pp 212-233
Stanlake, Chapter 22, pp 268-278
Gillespie, pp 81-83
g
Candidates should understand the
sources of money supply in an open
economy (commercial banks/credit
creation, central bank, deficit financing,
total currency flow).
Students should try and find information on the sources of money in their
own country
They should also attempt to obtain data on the money supply and the
rate of inflation in their own country over a period of time and see what
conclusions can be drawn about their relationship.
Tutor2u: The Quantity Theory of Money
Bamford, Chapter 11, pp 222-223
Anderton, Units 84 and 85, pp 564-573
Stanlake, Chapter 34, pp 323-324
Stanlake, Chapter 66, pp 628-629
Gillespie, pp 67 and 74-75
They should also have an
understanding of the relationship
between the money supply, the price
level and output as explained by the
The self-assessment task in Bamford (page 224) is very good on the link
between changes in the money supply and changes in the rate of
inflation.
Questions 1 (page 565) and 3 (page 566) in Anderton are very good in
They should have an understanding of
inflationary and deflationary gaps and
be able to distinguish between the full
employment level of income and the
equilibrium level of income.
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h
Learning outcomes
Suggested Teaching activities
Quantity Theory of Money.
helping to explain the Quantity Theory of Money
There is also a useful discussion of the link between inflation and the
money supply in the Applied Economics section in Anderton (pages 567568) and a helpful data question on housing and the money supply
(pages 568-569).
Candidates should understand the
demand for money and the
determination of interest rates,
including both the Liquidity Preference
and the Loanable Funds theories.
Students should research the different rates of interest in their own
country and try to explain why there can be such a diversity of rates
rather than just one single rate.
They need to have a clear understanding of the diagrams; Bamford
(pages 224-226) and Gillespie (pages 69-72) are particularly helpful.
The self-assessment task on Japanese interest rates in Bamford (page
226) and questions 1 (page 559) and 2 (page 560) in Anderton are
useful; the latter question, however, uses interest rates which refer to the
UK financial market and so it might be better to construct and use a
similar table of local figures.
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Learning resources
Tutor2u:The Demand for Money
Tutor2u: Interest Rates and Economic
Activity
Bamford, Chapter 11, pp 224-226
Anderton, Units 82 and 83, pp 555-563
Stanlake, Chapter 16, pp 149-160
Gillespie, pp 61 and 69-72