Essential Macroeconomic Notes
Four main Macroeconomic Objectives:
Strong and steady economic growth- measured by real GDP
Low and stable inflation- target is 2% as measured by CPI (Consumer Price
Index)- Bank of England is responsible for achieving and maintaining this target.
Low unemployment- measured by Labour Force Survey
Satisfactory balance of payments position- UK wants to boost exports
Secondary economic objectives:
1. Reduce national debt
2. Reduce inequality
3. Sustainability
Measuring Economic Growth
GDP - This is a measure of economic growth. This can be measured by the value
of goods or the value of the goods.
GDP per capita = Total GDP
Population size
GNI – GDP plus net income from abroad
GNP – total output of the citizens of a country
Limitation of using GDP for comparison:
Hidden economy
Public spending -> might provide more benefits
The extent of income inequality
Purchasing Power Parity
Purchasing power is the real value of an amount of money in terms of what you
can actually buy with it. Using PPP in comparisons of countries’ living standards
involves adjusting the GDP per capita figures to take into account the difference
in purchasing power of those countries, with the results usually expressed in the
US dollars.
,Measuring Inflation
Inflation is the sustained rise in the average price of goods and services over a
period of time.
Deflation is when the average price will be falling
Hyperinflation is when average price is rising extremely quickly
Disinflation is when the rate of inflation is slowing down
Main measurements used for inflation:
The Retail Price Index (RPI)- Two surveys involved which are the Living
Costs and Food Survey and the second is by measuring inflation by the
items in the ‘basket’
The Consumer Price Index (CPI)- it is similar to RPI but some items are
excluded e.g. mortgage interest payments and council tax. It also uses
more of the population.
Limitations:
RPI excludes all household in the top 4% of income
Information given by households may be inaccurate
The basket of goods only change once a year so it could miss short term
spending habits
Importance:
These help determine wages and state benefits
It also measures the change in the UKs international competitiveness
Measuring Unemployment
,Unemployment is the number of people who are looking for a job but cannot find
one.
Two ways of measuring unemployment rate:
1. Claimant Count- The method of measuring unemployment according to
those people who are claiming unemployment related benefits e.g. JSA
(jobseekers allowance)
Advantages: easy to obtain, no cost of collecting the data, it is
updated monthly
Disadvantages: it can be manipulated by the government, it
excludes people who cant claim JSA
2. Labour Force Survey- A quarterly sample survey of households in the UK.
Its purpose is to provide information in the UK labour market.
Advantages: more accurate than the claimant count,
internationally agreed measure
Disadvantages: less up to date, expensive to collect, may be
unrepresentative of the population as a whole
Measuring the Balance of Payments
The balance of payments records the flow of money in and out of the country, it
is calculated by the value.
Current Account
This records all international exchanges of goods and services, it consists of four
categories:
Trade in goods
Trade in services e.g. tourism, insurance
International flows of income
Transfers of money
Trade surplus – money flow in is greater than the money flowing out
Trade deficit - money flow out is greater than the money flowing in
Measuring Development
, HDI includes social indicators to give a fuller picture of the quality of life in a
country. The three indicators include:
1. Health (life expectancy)
2. Education (average and expected years in school)
3. Standard of living (measured by real GNI)
Critics of HDI:
Long life expectancy doesn’t mean a high quality of life
Average number of years – doesn’t mean it was all a high quality
Other ways of measuring development:
Percentage working in agriculture
Number of mobile phones per 1000
Level of disease
Energy consumption per head
Access to clean water
The Circular Flow of Income
Four main Macroeconomic Objectives:
Strong and steady economic growth- measured by real GDP
Low and stable inflation- target is 2% as measured by CPI (Consumer Price
Index)- Bank of England is responsible for achieving and maintaining this target.
Low unemployment- measured by Labour Force Survey
Satisfactory balance of payments position- UK wants to boost exports
Secondary economic objectives:
1. Reduce national debt
2. Reduce inequality
3. Sustainability
Measuring Economic Growth
GDP - This is a measure of economic growth. This can be measured by the value
of goods or the value of the goods.
GDP per capita = Total GDP
Population size
GNI – GDP plus net income from abroad
GNP – total output of the citizens of a country
Limitation of using GDP for comparison:
Hidden economy
Public spending -> might provide more benefits
The extent of income inequality
Purchasing Power Parity
Purchasing power is the real value of an amount of money in terms of what you
can actually buy with it. Using PPP in comparisons of countries’ living standards
involves adjusting the GDP per capita figures to take into account the difference
in purchasing power of those countries, with the results usually expressed in the
US dollars.
,Measuring Inflation
Inflation is the sustained rise in the average price of goods and services over a
period of time.
Deflation is when the average price will be falling
Hyperinflation is when average price is rising extremely quickly
Disinflation is when the rate of inflation is slowing down
Main measurements used for inflation:
The Retail Price Index (RPI)- Two surveys involved which are the Living
Costs and Food Survey and the second is by measuring inflation by the
items in the ‘basket’
The Consumer Price Index (CPI)- it is similar to RPI but some items are
excluded e.g. mortgage interest payments and council tax. It also uses
more of the population.
Limitations:
RPI excludes all household in the top 4% of income
Information given by households may be inaccurate
The basket of goods only change once a year so it could miss short term
spending habits
Importance:
These help determine wages and state benefits
It also measures the change in the UKs international competitiveness
Measuring Unemployment
,Unemployment is the number of people who are looking for a job but cannot find
one.
Two ways of measuring unemployment rate:
1. Claimant Count- The method of measuring unemployment according to
those people who are claiming unemployment related benefits e.g. JSA
(jobseekers allowance)
Advantages: easy to obtain, no cost of collecting the data, it is
updated monthly
Disadvantages: it can be manipulated by the government, it
excludes people who cant claim JSA
2. Labour Force Survey- A quarterly sample survey of households in the UK.
Its purpose is to provide information in the UK labour market.
Advantages: more accurate than the claimant count,
internationally agreed measure
Disadvantages: less up to date, expensive to collect, may be
unrepresentative of the population as a whole
Measuring the Balance of Payments
The balance of payments records the flow of money in and out of the country, it
is calculated by the value.
Current Account
This records all international exchanges of goods and services, it consists of four
categories:
Trade in goods
Trade in services e.g. tourism, insurance
International flows of income
Transfers of money
Trade surplus – money flow in is greater than the money flowing out
Trade deficit - money flow out is greater than the money flowing in
Measuring Development
, HDI includes social indicators to give a fuller picture of the quality of life in a
country. The three indicators include:
1. Health (life expectancy)
2. Education (average and expected years in school)
3. Standard of living (measured by real GNI)
Critics of HDI:
Long life expectancy doesn’t mean a high quality of life
Average number of years – doesn’t mean it was all a high quality
Other ways of measuring development:
Percentage working in agriculture
Number of mobile phones per 1000
Level of disease
Energy consumption per head
Access to clean water
The Circular Flow of Income
