CHAPTER 45: GOVERNMENT MACROECONOMIC OBJECTIVES
45.1: Infl ation
45.2: B alance of paym ents stability
- Balance of payments: Record of all economic transactions between the residents of a country and the rest of
the world over a given period of time.
+ Receipts (credits) → money flowing into the country.
+ Payments (debits) → money flowing out of the country.
- Main components:
+ Current account: Trade in goods and services, primary income (investments and employments),
secondary income (current transfers - no exchange of goods or services).
+ Capital account.
+ Financial account: FDI, other forms of investment.
- Avoid persistent current account deficit:
+ Requires financing through borrowing from abroad (national debt), reducing international
confidence.
+ Can cause currency depreciation → higher import prices → imported inflation
- Avoid persistent current account surplus:
+ Weak domestic demand, over-reliance on export.
+ Lack of resources/raw materials for production.
- Stable exchange rate:
+ Encourage investment and confidence for firms and consumers.
45.3: Unem ploym ent
45.4: Econom ic gr ow th
45.5: Econom ic developm ent
- Economic development: Sustained improvement in living standards and welfare of a country’s population,
alongside economic growth.
- Features:
+ Income and living standards.
+ Health.
+ Education.
+ Equality.
+ Social improvements.
- Measuring:
+ HDI (human development index):
- Income (GNI per capita).
- Education (years of schooling).
- Health (life expectancy).
- Importance:
+ Reduces poverty.
+ Improves living standards.
+ Enhances social stability.
+ Supports long-term sustainable growth.
45.6: Su stainability
45.7: Redistr ibu tion of incom e and w ealth:
- Redistribution of income and wealth: Government policies that reallocate income and assets from richer
individuals or households to poorer ones, with the aim of reducing inequality and poverty.
+ Income → flow of earnings (wages, profits, interest
+ Wealth → stock of assets (property, savings, shares)
- Importance:
, + Reduce inequality: Large income and wealth gaps can cause social tension and limit social mobility.
+ Reduce poverty:
- Provides support to low-income households, unemployed, elderly, disabled.
- Improves access to basic necessities.
+ Improve equality of opportunity.
- Measurement: Gini coefficient.
+ Ranges from 0 (perfect equality) to 1 (perfect inequality).
+ Used to assess effectiveness of redistribution policies.
CHAPTER 46: LINK S B ETW EEN MACROECONOMIC PROB LEMS AND THEIR
INTERRELATEDNESS.
46.1: The r elationship betw een the inter nal and exter nal valu e of m oney
- Internal value of money:
+ The purchasing power of money within a country.
+ Inversely related to inflation.
+ Inflation ↑ → internal value ↓
- External value of money:
+ The exchange rate.
+ The value of a currency in terms of other currencies.
- How internal value affects external value:
+ Inflation rises in a country.
+ Internal value of money falls → each unit of currency buys fewer goods.
+ Domestic goods become less price competitive.
+ Exports fall → foreigners demand less of the currency.
+ Imports rise → residents sell more domestic currency to buy foreign currency.
+ Demand for the currency falls.
+ Supply of the currency rises.
+ Currency depreciates.
+ External value falls.
- How external value affects internal value:
+ Imports become more expensive.
+ Increase costs of:
- Imported consumer goods ↑.
- Imported raw materials ↑.
+ Domestic firms face higher costs.
+ Prices rise.
+ Inflation increases.
+ The internal value of money falls.
46.2: The r elationship betw een the balance of paym ents and infl ation
45.1: Infl ation
45.2: B alance of paym ents stability
- Balance of payments: Record of all economic transactions between the residents of a country and the rest of
the world over a given period of time.
+ Receipts (credits) → money flowing into the country.
+ Payments (debits) → money flowing out of the country.
- Main components:
+ Current account: Trade in goods and services, primary income (investments and employments),
secondary income (current transfers - no exchange of goods or services).
+ Capital account.
+ Financial account: FDI, other forms of investment.
- Avoid persistent current account deficit:
+ Requires financing through borrowing from abroad (national debt), reducing international
confidence.
+ Can cause currency depreciation → higher import prices → imported inflation
- Avoid persistent current account surplus:
+ Weak domestic demand, over-reliance on export.
+ Lack of resources/raw materials for production.
- Stable exchange rate:
+ Encourage investment and confidence for firms and consumers.
45.3: Unem ploym ent
45.4: Econom ic gr ow th
45.5: Econom ic developm ent
- Economic development: Sustained improvement in living standards and welfare of a country’s population,
alongside economic growth.
- Features:
+ Income and living standards.
+ Health.
+ Education.
+ Equality.
+ Social improvements.
- Measuring:
+ HDI (human development index):
- Income (GNI per capita).
- Education (years of schooling).
- Health (life expectancy).
- Importance:
+ Reduces poverty.
+ Improves living standards.
+ Enhances social stability.
+ Supports long-term sustainable growth.
45.6: Su stainability
45.7: Redistr ibu tion of incom e and w ealth:
- Redistribution of income and wealth: Government policies that reallocate income and assets from richer
individuals or households to poorer ones, with the aim of reducing inequality and poverty.
+ Income → flow of earnings (wages, profits, interest
+ Wealth → stock of assets (property, savings, shares)
- Importance:
, + Reduce inequality: Large income and wealth gaps can cause social tension and limit social mobility.
+ Reduce poverty:
- Provides support to low-income households, unemployed, elderly, disabled.
- Improves access to basic necessities.
+ Improve equality of opportunity.
- Measurement: Gini coefficient.
+ Ranges from 0 (perfect equality) to 1 (perfect inequality).
+ Used to assess effectiveness of redistribution policies.
CHAPTER 46: LINK S B ETW EEN MACROECONOMIC PROB LEMS AND THEIR
INTERRELATEDNESS.
46.1: The r elationship betw een the inter nal and exter nal valu e of m oney
- Internal value of money:
+ The purchasing power of money within a country.
+ Inversely related to inflation.
+ Inflation ↑ → internal value ↓
- External value of money:
+ The exchange rate.
+ The value of a currency in terms of other currencies.
- How internal value affects external value:
+ Inflation rises in a country.
+ Internal value of money falls → each unit of currency buys fewer goods.
+ Domestic goods become less price competitive.
+ Exports fall → foreigners demand less of the currency.
+ Imports rise → residents sell more domestic currency to buy foreign currency.
+ Demand for the currency falls.
+ Supply of the currency rises.
+ Currency depreciates.
+ External value falls.
- How external value affects internal value:
+ Imports become more expensive.
+ Increase costs of:
- Imported consumer goods ↑.
- Imported raw materials ↑.
+ Domestic firms face higher costs.
+ Prices rise.
+ Inflation increases.
+ The internal value of money falls.
46.2: The r elationship betw een the balance of paym ents and infl ation
