1
A LEVEL ECONOMICS: THE NATIONAL AND
INTERNATIONAL ECONOMY
4.2.1 – The measurement of macroeconomic performance
4.2.1.1 The objectives of government economic policy
Four factors considered when measuring macroeconomic success
Economic Ideally our capacity to produce goods will grow over time
growth - Higher output = more affluent (richer) economy, as value of
output = value of incomes for workers and owners of FOP
- Steady rate of growth desired (no recessions)
Full employment Ideally we will have an efficient economy in which all resources are
used and everyone able and willing has a job
- High employment increases welfare of society
Price stability Ideally we will have control over prices and low inflation (2%)
Balance of trade Ideally exports will be greater than or equal to imports
Smaller objectives:
- Achieving an equitable distribution of income i.e. income equality (minimising
the margin between the rich and the poor)
- Balancing the budget → fiscal austerity/fiscal stimulus
4.2.1.2 Macroeconomic indicators
Economic Economic statistics that provide information about the
indicators expansions and contractions of economic cycles
Performance Provides information for judging the success or failure of a
indicators particular type of government policy
- Lead indicators: provide information about the future state
of the economy
- Lag indicators: provide information about past and
possibly current economic performance, and the extent to
which policy objectives have been achieved
Policy objectives Targets or goals that government wants to meet
Policy instruments Techniques used by government to achieve policy objectives
Objectives Indicators Instruments
Full employment Claimant count figures
Labour force survey
Economic growth GDP
Monetary, fiscal and supply-
GDP per capita
side policies
Stable prices RPI
CPI
Balance of payments % of GDP
ONS figures
1|T. Chaudhary
,2
4.2.1.3 Uses of index numbers
Index numbers
Index number A weighted average of a group of items compared to a given base
value that is typically 100
- In the following years, percentage increases and decreases cause
changes in the index number relative to the previous year
- Enables accurate comparisons to be made over time
Measurement of inflation
Weighting Where a commodity is given a weighting proportional to its importance
in the general pattern of consumer spending
Calculating index numbers:
- Percentage change = (change in price ÷ original price) x 100
- Price-weight index = price index x weighting (%)
1. Select a base year and give the index number 100 to all goods
EG: Apples = 50p = Index 100
2. Calculate annual percentage price increase for the good and apply this to index
EG: Apples = 75p = Increase of 50% = Index 150
3. Weight and average all figures to get an overall index figure
EG: Apples = 150 (x weight: 2), Plums = 120 (x weight 1) → Inflation = 420/3 = 140
4. Take 100 from this figure to get an overall figure for inflation
140 – 100 = 40 → Inflation = 40% from Year 1 to Year 2
4.2.1.4 Uses of national income data
National income
Gross domestic product (GDP) Output produced by resources within UK
Gross national product (GNP) GDP plus net property income from abroad
National income (NI) GNP minus depreciation of capital equipment
Issues with using GDP as measure of living standards
Incomplete - Excludes non-monetised sector
- Does not take into account what is produced (some items
cause more happiness than others)
Quality levels May not show rises in quality:
- Price/quantity same, quality increase (not measured)
Income distribution GDP can rise but equality may not rise with it
Leisure time GDP does not include amount/quality of leisure time
Negative Pursuit of economic growth can damage environment, lead to
externalities congestion etc.
As it is hard to compare currencies between countries, may need to use:
Purchasing power parity Exchange rates taking into account the cost of a basket
(PPP) of goods in one country compared to another
2|T. Chaudhary
,3
4.2.2 – How the macroeconomy works: the circular flow of income,
AD/AS analysis, and related concepts
4.2.2.1 The circular flow of income
Flow Something measured over a specific period of time e.g. income
Stock Something that has value at a point in time e.g. wealth (stock of assets)
National Stock of all goods that exist at a point in time that have value in the
wealth economy
National Flow of new output produced by the economy in a particular period
income (also called national output and national product)
National income = national output = national expenditure
- National output measures actual goods and services produced by the economy
- National income measures the incomes received by labour and other FOP when
producing the goods and services
- National expenditure shows the spending of these incomes on goods and services
The four-sector economy
Injection Spending entering the circular flow of income
- Investment, government spending and exports
- Increases national income/output/expenditure
Withdrawal Leakage of spending power out of the circular flow of income
- Savings, taxation and imports
- Reduces national income/output/expenditure
Planned saving = National income in equilibrium
planned investment
Injections = withdrawals National income in equilibrium
Injections > withdrawals National income rising
Injections < withdrawals National income falling
4.2.2.2 Aggregate demand and aggregate supply analysis
Aggregate Total planned demand for final goods and services produced in an
demand economy at a given price level in a given time period, made up of:
- Consumption (C)
- Investment (I)
- Government Expenditure (G)
- Net Exports (Exports = X, Imports = M)
The identity for aggregate demand is: C + I + G + (X – M)
Aggregate Total planned supply of goods and services produced within an
supply economy at a given price level in a given time period
The interaction of these two forces produces a macroeconomic equilibrium
3|T. Chaudhary
, 4
Macroeconomic equilibrium
Equilibrium national income Level at which AD=AS or when withdrawals=injections
Aggregate demand
Increase in AD Decrease in AD
AD1 → AD2 = rise in output and prices 1. Reduction in aggregate demand
AD2 → AD3 = small rise in output and great rise in 2. Unemployment → fall in national
prices
Beyond AD3 = no change in output and rise in
income
prices (INFLATION) 3. Business expectations fall
4. Investment falls
1. AD rises faster than AS 5. Government tax income falls
2. Inflation occurs 6. Benefit expenditure rises
3. Increase in imports 7. Budget deficit
4. Balance of payments deficit
Economic shocks
Demand-side shock An unexpected event that increases/decreases AD rapidly
- Changes in spending due to the ‘wealth effect’
- Interest rates
- Tax rates
- Exchange rates
Supply-side shock An unexpected event that increases/decreases AS rapidly
- Changes in price of raw materials e.g. oil
- Indirect taxes such as VAT
- Subsidies
- Immigration
4|T. Chaudhary
A LEVEL ECONOMICS: THE NATIONAL AND
INTERNATIONAL ECONOMY
4.2.1 – The measurement of macroeconomic performance
4.2.1.1 The objectives of government economic policy
Four factors considered when measuring macroeconomic success
Economic Ideally our capacity to produce goods will grow over time
growth - Higher output = more affluent (richer) economy, as value of
output = value of incomes for workers and owners of FOP
- Steady rate of growth desired (no recessions)
Full employment Ideally we will have an efficient economy in which all resources are
used and everyone able and willing has a job
- High employment increases welfare of society
Price stability Ideally we will have control over prices and low inflation (2%)
Balance of trade Ideally exports will be greater than or equal to imports
Smaller objectives:
- Achieving an equitable distribution of income i.e. income equality (minimising
the margin between the rich and the poor)
- Balancing the budget → fiscal austerity/fiscal stimulus
4.2.1.2 Macroeconomic indicators
Economic Economic statistics that provide information about the
indicators expansions and contractions of economic cycles
Performance Provides information for judging the success or failure of a
indicators particular type of government policy
- Lead indicators: provide information about the future state
of the economy
- Lag indicators: provide information about past and
possibly current economic performance, and the extent to
which policy objectives have been achieved
Policy objectives Targets or goals that government wants to meet
Policy instruments Techniques used by government to achieve policy objectives
Objectives Indicators Instruments
Full employment Claimant count figures
Labour force survey
Economic growth GDP
Monetary, fiscal and supply-
GDP per capita
side policies
Stable prices RPI
CPI
Balance of payments % of GDP
ONS figures
1|T. Chaudhary
,2
4.2.1.3 Uses of index numbers
Index numbers
Index number A weighted average of a group of items compared to a given base
value that is typically 100
- In the following years, percentage increases and decreases cause
changes in the index number relative to the previous year
- Enables accurate comparisons to be made over time
Measurement of inflation
Weighting Where a commodity is given a weighting proportional to its importance
in the general pattern of consumer spending
Calculating index numbers:
- Percentage change = (change in price ÷ original price) x 100
- Price-weight index = price index x weighting (%)
1. Select a base year and give the index number 100 to all goods
EG: Apples = 50p = Index 100
2. Calculate annual percentage price increase for the good and apply this to index
EG: Apples = 75p = Increase of 50% = Index 150
3. Weight and average all figures to get an overall index figure
EG: Apples = 150 (x weight: 2), Plums = 120 (x weight 1) → Inflation = 420/3 = 140
4. Take 100 from this figure to get an overall figure for inflation
140 – 100 = 40 → Inflation = 40% from Year 1 to Year 2
4.2.1.4 Uses of national income data
National income
Gross domestic product (GDP) Output produced by resources within UK
Gross national product (GNP) GDP plus net property income from abroad
National income (NI) GNP minus depreciation of capital equipment
Issues with using GDP as measure of living standards
Incomplete - Excludes non-monetised sector
- Does not take into account what is produced (some items
cause more happiness than others)
Quality levels May not show rises in quality:
- Price/quantity same, quality increase (not measured)
Income distribution GDP can rise but equality may not rise with it
Leisure time GDP does not include amount/quality of leisure time
Negative Pursuit of economic growth can damage environment, lead to
externalities congestion etc.
As it is hard to compare currencies between countries, may need to use:
Purchasing power parity Exchange rates taking into account the cost of a basket
(PPP) of goods in one country compared to another
2|T. Chaudhary
,3
4.2.2 – How the macroeconomy works: the circular flow of income,
AD/AS analysis, and related concepts
4.2.2.1 The circular flow of income
Flow Something measured over a specific period of time e.g. income
Stock Something that has value at a point in time e.g. wealth (stock of assets)
National Stock of all goods that exist at a point in time that have value in the
wealth economy
National Flow of new output produced by the economy in a particular period
income (also called national output and national product)
National income = national output = national expenditure
- National output measures actual goods and services produced by the economy
- National income measures the incomes received by labour and other FOP when
producing the goods and services
- National expenditure shows the spending of these incomes on goods and services
The four-sector economy
Injection Spending entering the circular flow of income
- Investment, government spending and exports
- Increases national income/output/expenditure
Withdrawal Leakage of spending power out of the circular flow of income
- Savings, taxation and imports
- Reduces national income/output/expenditure
Planned saving = National income in equilibrium
planned investment
Injections = withdrawals National income in equilibrium
Injections > withdrawals National income rising
Injections < withdrawals National income falling
4.2.2.2 Aggregate demand and aggregate supply analysis
Aggregate Total planned demand for final goods and services produced in an
demand economy at a given price level in a given time period, made up of:
- Consumption (C)
- Investment (I)
- Government Expenditure (G)
- Net Exports (Exports = X, Imports = M)
The identity for aggregate demand is: C + I + G + (X – M)
Aggregate Total planned supply of goods and services produced within an
supply economy at a given price level in a given time period
The interaction of these two forces produces a macroeconomic equilibrium
3|T. Chaudhary
, 4
Macroeconomic equilibrium
Equilibrium national income Level at which AD=AS or when withdrawals=injections
Aggregate demand
Increase in AD Decrease in AD
AD1 → AD2 = rise in output and prices 1. Reduction in aggregate demand
AD2 → AD3 = small rise in output and great rise in 2. Unemployment → fall in national
prices
Beyond AD3 = no change in output and rise in
income
prices (INFLATION) 3. Business expectations fall
4. Investment falls
1. AD rises faster than AS 5. Government tax income falls
2. Inflation occurs 6. Benefit expenditure rises
3. Increase in imports 7. Budget deficit
4. Balance of payments deficit
Economic shocks
Demand-side shock An unexpected event that increases/decreases AD rapidly
- Changes in spending due to the ‘wealth effect’
- Interest rates
- Tax rates
- Exchange rates
Supply-side shock An unexpected event that increases/decreases AS rapidly
- Changes in price of raw materials e.g. oil
- Indirect taxes such as VAT
- Subsidies
- Immigration
4|T. Chaudhary
