Unit 2 MacroeconomicsThe ‘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 IncomeThe interdependence of goods marketsand 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

Q1

P1

QF2

PF2

Q2

P2PF1

QF1

D2D2

The interdependence of goods and factor markets

P

Q

P

Q

£ £

££

Factorservices

Goods

GoodsFactor

services

S S

D1 D1

(1)Consumerdemand

(4)Factor supply

(3)Factor

demand

(2)Producer

supply

OO

Multiplier effect

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’….

Factorpayments

Consumption ofdomestically

produced goodsand services (Cd)

The circular flow of income

Firms

Households

Factorpayments

Consumption ofdomestically

produced goodsand services (Cd)

Investment (I)Government

expenditure (G)

Exportexpenditure (X)

BANKS, etc

Netsaving (S)

GOV.

Nettaxes (T)

ABROAD

Importexpenditure (M)

The circular flow of income

WITHDRAWALS

INJECTIONS

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 IncomeMeasuring 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) = all expenditure on output is added.

What’s the differenceGDP 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 trans-national) 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)

Real GDP (1995=100)

1995 100.0 100.0 100.01996 105.9 103.3 102.6

1997 112.8 106.3

1998 119.3 109.5

1999 124.8 112.0

2000 130.9 114.0

Homework… for Wednesday

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.