Summary CIE AS Level Economics C4 The Macroeconomy (AS)

CHAPTER 4 :


THE macro economy
4. 1 WHAT IS THE MACRO ECONOMY ?

the whole
1¥ →
economy as a


0 level of economic activity determined by aggregate demand (Ab)
and aggregate supply ( AS ) .




4. 2 GROSS DOMESTIC PRODUCT ( GDP)

= UNDERSTANDING GDP =




o measures total income of everyone in the economy

o measures total expenditure on economy 's output of Gbs .




<

Producer 's consumer buy Gbs
income = expenditure
profits 7




→ circular flow diagram :


-
factors of production ( labour ,
land , capital & natural
resources )

factor payments ( payments to FOP )

FIRMS HOUSEHOLDS

⇒ buy / hire Fop ( use them ⇒ own FOP ,
sell / rent to

to produce goods ) firms for income

⇒ sell G&S ⇒ buy & consume Gbs


revenue ( = GDP ) markets spending ( = Gop ,
<
for goods and
>
services Gas
Gbs
sold bought
✓ ~




firms households
labour '



n factors of land & ^
production market for capital
<
factors of
>
wages rent & Production
,
income f- GDP )
profit ( = GDP )

* omits government , financial system a foreign sector

,= DEFINITION OF GDP =




↳ market value of all final goods & services produced within

a country in a
given time .




① market value
-
value of GIs @ selling price 1 same units e. g. us b)

-

✗ market value e. g. household chores EXCLUDED

② final Gbs

-
intended for consumer usage
-
intermediate goods : components / ingredients




{
embodies
baking . . .
value of
> intermediate
goods


$10.00 $15.00
③ within a country
-
production which occurs within a country 's borders
I can be done by citizens / foreign workers )

④ given period of time
-

currently produced goods ( not in the past )
- v 3- 12 months > house I built 2018 ) bought in 2021
,



:> ✗ counted in 2021 GDP
= components OF GDP =




① consumption ( C )
-
total spending by households on Gbs

↳ housing costs

t >
landlords ( imputed rental value ONLY )
tenants
①
trent payment )
✗ purchase price / mortgage payments
② investment III
-

total spending on goods that will be used to produce other goods in
the future

↳ capital equipment ( machinery ) ,
infrastructure ,
inventories

( produced but not sold yet ]

,③ government spending (G)
-

total spending on Gbs purchased by government

↳ transfer payments e. g. unemployment insurance benefits ,



pensions

↳ public goods & merit goods
④ net exports ( NX )
-
total foreign spending on economy 's GIs [ exports ]
-


portion of C , I & G spent on G&S produced abroad [ imports ]

MX =
exports -
imports


: .
GDP calculation : GDP = C + I t G + NX


=
WHAT IS GDP USED FOR ? =



o real GDP per capita → main indicator of average person 's standard

of living
BUT ! ! does not value : childcare etc
_
,




-

quality of environment -
non -
market activity

-

leisure time -
equitable income distribution

o
large GDP allows countries to afford :
L cases where people may be
-
better schools poorer / richer than depicted

-
cleaner environment

-
quality healthcare

* Hbl positively correlated WI GDP


specific to each Gbs ( Mb )
4. 3 AGGREGATE DEMAND ( Ab )

aggregate demands > total spending on an economy 's Gas @ given
N v r - revert

price level in a given time period
price level
.




n > shows quantity of GIS that households ,



firms & governments want to buy @ each
nationwide basis ; level
price
all Gds
o
negative relationship 1 inverse ) with
A
price level : . downward sloping
AD
0
Consists of 4 components
0 >
real GDP

, =
WHY IS AD DOWNWARD SLOPING ? =



① wealth effect 1 price level
G consumption )
price level tr ; real value of money 4 .
I higher spending power )
"
wealthier spend more
"
i. consumers are =




↳ consumer spending 4 ; demand for GIS 4 .




}
$5 $20 Purchasing
⇒ power
T
4 cones 10 cones
$2 : feels richer
/ THEN , ( now , .
,


ADR
② interest rate effect ( price level & investment )

price level W ; interest rate to
less borrow
expensive to

i. spending on investment goods 4 from banks
;
G&S demanded 4

low price usually due to deflation 1 bad economy )

gov discourage money in banks
•
keeping
: .
interest rate tr

??? INVESTMENT > more worth it

③ exchange rate / international effect 1 price level & net exports )
price level to ; interest rates to ; real exchange rate

HOWEVER ,
net exports 1^1 export price 4 : . more countries

i. Ab R purchase ( exports > imports )

summary ⇒ price level tr ,
Ab tr .




= components OF AGGREGATE Demand =




C-
consumption




}
↳ consumer confidence 9 income tax tr ,
,



wealth R money supply 9 , population A
,

G government spending
-




↳ desire to stimulate economic activity I
win political support 4 curve
I -

investment shifts
right
↳ business confidence 4 , corporate tax T ,



technological advances .




NX -

net exports
↳ man , ,, , , .mn, , , .mg, , .mu, ,
incomes in foreign countries 4 .