Unit 2 Macroeconomics
The ‘Big’ Picture
What is it?
• Macroeconomics considers the economy as a whole – this is
the total amount of different goods and services produced by
all businesses and the government sector
• Key performance indicators
• Objectives
• Policy instruments
What are objectives and
instruments?
• Objectives are the aims or goals of government policy
• Instruments are the means by which these aims might be
achieved
UK Macroeconomic Policy
Objectives
•
•
•
•
•
•
Stable low inflation
Sustainable growth
Improvements in productivity
High employment
Rising living standards
Financial stability
Policy Instruments
• Monetary policy –changes to interest rates, the money
supply, access to credit and also changes to the value of the
exchange rate
• Fiscal policy – changes to government taxation, spending and
borrowing
• Supply-side policies designed to make markets work more
efficiently
What sectors make up an economy?
Households
Firms
Government
International
The Circular Flow of
Income
The interdependence of goods markets
and factor markets
The interdependence of goods and
factor markets
FIRMS
(suppliers of goods and services,
demanders of factor services)
HOUSEHOLDS
(demanders of goods and services,
suppliers of factor services)
The interdependence of goods and factor markets
(3)
Factor
demand
£
£
Factor
services
P
(2)
Producer
supply
Goods
P
S
S
PF2
PF1
D2
Multiplier
effect
P2
P1
D2
D1
O
QF1QF2
Q
Factor
services
(4)
Factor
supply
£
D1
O
Q1 Q 2
Goods
(1)
£
Consumer
demand
Q
The circular flow of
income
Consumption, injections, withdrawals and equilibrium
Need a whole A4 page for this
diagram
• Need it to be landscape
• Start off on the far left side…..
• Need lots of space for the diagram to
‘grow’….
The circular flow of income
Firms
Factor
payments
Consumption of
domestically
produced goods
and services (Cd)
Households
The circular flow of income
INJECTIONS
Export
expenditure (X)
Investment (I)
Factor
payments
Consumption of
domestically
produced goods
and services (Cd)
Government
expenditure (G)
BANKS, etc
Net
saving (S)
GOV.
ABROAD
Import
Net
expenditure (M)
taxes (T)
WITHDRAWALS
Key terms…
Injections = I + G + X
Withdrawals = S + T + M
Circular Flow of Income – what
if….
•What if
Injections*
are greater
than
withdrawals?
•*Injections = I + G + X
Multiplier
effect
•What if
withdrawals*
are greater
than
Injections?
•*Withdrawals = S + T + M
Government Macro Economic
policies…
Look at managing injections and
withdrawals to allow a positive economic
growth of 2% per year.
The Govt can achieve this either by
reducing withdrawals
or by increasing injections
National Income
Measuring economic growth
National Growth
National Income = all incomes from FoP are added
(from Firms to Households)
National Product = all g & s produced (by firms)
National Expenditure (AD)
output is added.
= all expenditure on
What’s the difference
GDP v GNP
GDP v GNP
•GDP measures the value of
output produced within the
domestic boundaries of the UK
over a given time period.
•GDP includes the output of the
many foreign owned firms that
are located in the UK following
the high levels of foreign direct
investment in the UK economy
over many years.
•GNP measures the final value of
output or expenditure by UK
owned factors of production
whether they are located in the
UK or overseas.
•Many foreign firms have set
up production plants in the
UK whilst UK firms have
expanded their operations
overseas and become
multinational (or transnational) organisations.
Key Terms needed…..
Real & Nominal
Nominal
Nomianal or current GDP looks at the monetary value
Real
Real takes into account of inflation
Complete the task on the sheet…
current prices
(1995=100)
Price Index
(1995=100)
1995
1996
100.0
105.9
100.0
103.3
1997
112.8
106.3
1998
119.3
109.5
1999
124.8
112.0
2000
130.9
114.0
Real GDP
(1995=100)
100.0
102.6
News article – research an article
from a reputable source:
•BBC
•Financial Times
•Guardian
•Independent
•The Times
•The Economist
Article must be on one of the following
topics…
•UK inflation
•UK employment / unemployment
•UK interest rates
•UK economic growth
Analyse the key issues raised
in the article.
Homework… for
Wednesday