Edexel macroeconomics notes (theme 2)

Macroeconomics:
Macroeconomics = Branch of economics which studies the behaviour and performance of
an economy as a whole. It focuses on changes in the economy such as unemployment, GDP
and inflation
Economics:
 Social science
 How people live and interact
 Subjective so no fixed rules and patterns.
Main economic problem: What do we use our resources for?
1. What to produce
2. Who to produce if for?
3. How to produce it
4. Scarcity – Limited resources + unlimited wants
Employ efficiently – FACTORS OF PRODUCTION
1. C – Capital – machinery + buildings
2. E- Enterprise – skills of workers, owners, entrepreneurs
3. L – Land – property, what its built of
4. L - Labour – employees + lending workforce


Economic statements:
This can either be positive or normative.
Positive
 Can be proven
 Empirically factual
 Based on tested data
Example – Rising wages by 10% will reduce poverty by 20%. This can be tested and be
factually proven
Normative:
 Subjective
 Opinion based
 Not factual
 Involves words such as ‘fair’ and ‘should’ and ‘might’
Example – A rise of tax is unfair on the poor; it might lead to more poverty and shouldn’t be
done.

, Economic Growth:
Short run = The actual annual percentage change in real national output.
 National output measured in GDP
 REAL national output is the GDP without taking inflation into account
Long run = An increase in the potential productive capacity of the economy
Measuring economic growth using GDP:
 Economic growth = Increase in real GDP
 GDP = Total G+S produced in a year, or spent/earned
 Potential EG = measure of increase in productive capacity of an economy – show by
outwards movement on PPF
 A recession occurs when an economy suffers two consecutive quarters of negative
EG – caused by less spending, income and output – results in unemployment +
decreased living standards


Nominal and real value:
 Nominal value is money value of G+S by country in 1 year
 Real value taken inflation into account
 Real national output = nominal national output / average price level
 Short run economic growth is measured by annual change in real national output,
real national income or real GDP


GDP vs GNI:
 GNI = Measure of income received by a country domestically (GDP) and via net
incomes from overseas
 GNI = GDP + profits from people and companies abroad – profits from people and
companies from abroad that leave the economy and go abroad.


Purchasing power parties (PPP)
 Used to compare GDP in different countries + takes into account basket of goods of
each country.
 PPP exchange rate = rate that equalises purchasing power of different countries by
eliminating price differences

,Limitations of GDP for living standards
 Two countries may have the same GDP but different living standards – reasons:
 Different populations – for per capita
 Different rates of inflation – real GDP comparison
 Difference in exchange rate
 Difference in income distribution


National happiness used instead of GDP for living standards:

, Macro-Economic Equilibrium
Aggregate Demand
AD = C + I + G + (X – M)
 C= consumption of g+s of firms in economy *Households*
 I = Investments (firms buying capital goods from other firms) *Firms*
 G = Gov spending * Government*
 X-M = Net trade of exports – imports,
 Net trade is how much firms export to other countries in relation to the consumption
of households.
J = W – injections = withdrawals (equilibrium)
G = T – balanced budget
G= gov spending
T= taxes
X = M = Exports = imports
 G > T – budget deficit (need to borrow money)
 G < T = budget surplus


X = M – Exchange rate (price of pound in relation to other)
 S- strong
 P-pound
 I- imports
 C- cheaper
 E-exports
 E -expensive
Equilibrium is when:
 I = S – borrowing = saving
 G=T
 X=M
 J=W