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Macroeconomics
The field of economics that studies the behavior of the aggregate economy through considering economy wide elements:
changes in (un)employment national income rate of growth gross domestic product inflation and price levels

Objectives
Full employment Real economic growth
growth in national income per head of population improved living standards an acceptable distribution of wealth

Price stability
Limited inflation

An acceptable balance between exports and imports

Manageable balance of payments over time.

The Circular Flow

The main stream flows clockwise around the circle, first as income from firms to households the lower half of the circle then as spending from households to firms the upper half of the circle. For each flow of money there is an equal and opposite flow of goods or resources.

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Gross Domestic Product

Considered as:
The total market value of all final goods and services produced within the country in a given period of time (usually a calendar year). The sum of value added at every stage of production (the intermediate stages) of all final goods and services produced within a country in a given period of time. The total output of goods and services during a year, measured at purchase price.

Consumption
Private (household) consumption influenced by:
the level of households incomes, the rate of tax, and the portion of a households income that is saved.

Consumption + Investment + Government Spending +/- Balance of payments.

Investment
Made by organizations and households in capital items:
Buildings Construction works Plant and equipment New houses (household capital expenditure).

Government spending
Covers all government consumption (on final goods and services) and government investment (e.g. infrastructure). In most economies, government spending forms a large portion of the countrys GDP and will be determined by the governments fiscal policy.

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Balance of payments
The value of exports minus the value of imports. GDP measures what is produced domestically, thus:
exports are included (as these would not be recorded under household or government expenditure) imports are deducted (as they would not have been produced domestically, yet will be included within household and government expenditure as consumption).

GDP: Expenditure Approach

Using the expenditure approach, an economys aggregate expenditure equals the sum of
Consumption, C Investment, I Government Purchases, G Net Exports, (Exports, X, minus Imports, I) C + I + G + (X M) = Aggregate Expenditures = GDP

Inflationary and deflationary gap

In a situation where resources are already fully employed, there may be an inflationary gap since increases in demand will cause price changes, but no variations in real output. A shift in demand or supply will not only change the national income, it will also change price levels. A deflationary gap exists when there is insufficient demand available in the economy to generate a full-employment equilibrium. In other words there is not enough being bought to provide jobs for everyone who wants them.

Factors that influence level of business activities

Consumer confidence Aggregate demand Capital (availability of finance) Exchange rates Use of resources (new tech, adv in education etc) Government policy

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Business trade cycle

Recession
A general definition of being in a recession is when GDP is negative for two or more consecutive quarters. As demand falls and businesses reduce their output, individuals may lose their jobs and as a result, there is increased pressure on household incomes and demand falls yet further. Returns on investment will decline with some projects being cut or put on hold. Orders will decline, inventory levels reduce, prices will fall and some business will face closure.

Depression
Depression is a severe economic downturn that will usually last several years. Annual GDP decline will be of the order of -5% to -15%. The main driving factor is a loss of consumer confidence. Consumers do not buy, but try to survive on basic goods and services and save what they can. Some characteristics of a depression are mass unemployment, restriction of sources of finance, reduced output and currency volatility.

Recovery
As and when consumer confidence returns businesses will begin to retool, restock and employ more people. As recovery continues, the output level will rise above the general trend line, entering into the boom phase.

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Boom
Households will have higher incomes due to higher salaries, higher share of profits and higher dividends. Capacity and labor become fully utilized. This will lead to increasing costs as competition for limited resources intensifies or the demand is met through importing. Increasing the sales price may also be a result of trying to control demand.

Inflation
Inflation is a sustained increase in the
average price level

Hyperinflation: Extremely high inflation, German hyperinflation of 1922/23 A sustained decrease in the average price level is called deflation A reduction in the rate of inflation is called disinflation

The rate of increase of the general level of prices being a sustained increase in the aggregate or general price level in an economy. Various measures include CPI, RPI, PPI, IPI, OPI A CPI attempts to measure changes over time in the monetary cost of a statistically weighted representative basket of goods and services.

Causes of Inflation
Demand-pull inflation is inflation initiated by an increase in aggregate demand.
Cost-push, or supply-side, inflation is inflation caused by an increase in costs.

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Costs of inflation
Consequences of high inflation include:
Lower standards of living Redistribution of income: Fixed income, borrowers vs. lenders Disincentive to save : e.g. Buy today, or it will be expensive tomorrow Impact on money, imports and exports Causes uncertainty and stifles business investments Wage-price spiral

Shoe Leather costs. If inflation forces up the price of raw materials or components, the firm will be forced to shop around for cheaper raw materials or components, again increasing costs to management. Increasing menu costs. If inflation is at a high level, firms will have to continuously re-price goods. This re-pricing brings with it costs such as reprinting of brochures, sales details etc.

Unemployment
The amount of joblessness in the economy.
A person is generally unemployed if they are willing and able to work, but cannot find employment.

Unemployment
Consequences include:
Adverse social effects social blight Greater divisions within society Higher governmental costs Loss of potential for maintaining or increasing national output and income Loss of work skills and experience

Categories include:
Real wage: caused by wages in the labor market being pushed beyond the equilibrium as a result of trade union action or minimum wage requirements, resulting in businesses being able to afford to employ fewer staff. Frictional: caused by workers moving between jobs Seasonal: caused because of seasonal fluctuations in demand for labor Structural: : caused by structural change in the economy, leading often to a change in skills required. Cyclical: caused by the fall in aggregate demand. Hidden

Government policies include:

Job creation schemes, grant assistance, incentives Labour mobility schemes

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Stagnation
A relatively long period of very low or no economic growth Economic growth of less than 2% - 3% Slow or sluggish growth = existing unemployment levels cannot be lowered Weak demand for goods and services

Stagflation
A combination of high unemployment and high inflation Reduced job opportunities, lower pay packages and rising prices Reduced demand for goods and services and increased in prices of raw materials.

International Payments Disequilibrium

Occurs when the balance of payments is negative. The balance of payments:
Is a record of a countrys transactions with the rest of the world Shows the net receipts from various aspects of trade and consists of the current and financial account. A separate capital account shows the impact of the capital elements contained within the current and financial accounts.

Current account
The record of payments in trade and services, sub divided as:
balance of payments (trade) in goods - visibles balance of payments (trade) in services, e.g. tourism, insurance - invisibles net income flows (e.g. wages and investment income) net current transfers (e.g. government aid).

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Financial account
A measure of the net payments to and from other countries for investment purposes, e.g.
investment abroad (outward investment) investment from abroad (inward investment)

Monetary policies
Those actions taken by the government or the central bank to achieve economic objectives using monetary instruments. These actions may either directly control the amount of money in circulation (the money supply) or attempt to reduce the demand for money through its price (interest rates)

Money supply
Can be controlled through:
Interest rates Credit controls Direct intervention by central bank Foreign exchange Open market operations

The impact on a business of higher interest rates People may borrow less because it costs more money to pay back the loan It costs the business more money to pay back any loans

So people buy fewer consumer goods

So the business needs to find more money to pay back its loans

The business decides not to invest in new equipment

So businesses sell fewer products

The business becomes less competitive

The business may make less profit

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The impact on a business of lower interest rates People may borrow more because it costs less money to pay back the loan It costs the business less money to pay back any loans

Exchange rate
The exchange rate is the price of one currency expressed in terms of another. If the UK exchange rate increases it means the pound sterling is stronger and other currencies are weaker Appreciation Depreciation

So people buy more consumer goods

So the business needs to find less money to pay back its loans

The business decides to invest in new equipment

So businesses sell more products

The business becomes more competitive

The business may make more profit

Fiscal policy
Action by the government to achieve economic objectives through the use of the fiscal instruments of taxation, public spending and the budget deficit or surplus. Reflate an economy through:
Increased government spending Reduced taxation

Deflate an economy through:

Reducing government expenditure Increasing taxation

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Borrowing: To the extent that a government's expenditure exceeds its income it must borrow to make up the difference. The amount that the government must borrow each year is now known as the Public Sector Net Cash Requirement (PSNCR) or in UK it is was formerly named as Public Sector Borrowing Requirement (PSBR).

Fiscal policy
Reflating problems:
Intervention into a free market Unemployment Time lags Tax cuts may not boost domestic demand Budget deficit plus increased inflation

Deflating problems:
Government spending cannot be drastically cut Time lags Increased taxes discourages enterprise

Supply side approach

Policies that focus on creating the right conditions in which private enterprise can flourish Raise the capacity of the economy to provide the output demanded. The private sector, being driven by the profit motive, is deemed to be more efficient at providing the output required than the public sector

Supply side approach

Supply side policies include:
low tax rates to encourage private enterprise the promotion of a stable low inflation economy limited government spending and intervention a balanced fiscal budget deregulation of industries reduction in the rights of employees/power of trade unions increase in the training and education of the workforce increase of business infrastructures a reduction in planning legislation

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Taxation
Used to:
raise revenues for the government (fiscal policy) raise barriers to activities considered undesirable price products at their social costs redistribute income and wealth protect industries from foreign competition and dumping

Taxation forms
Proportional taxation
Based on a fixed proportion of the item base

Progressive taxation
Increases as the tax base increases

Direct taxes
Paid directly to the government can be proportional or progressive and are usually unavoidable

Indirect taxes
Not paid directly by the end user, but are collected by the government through an intermediary

Economic growth
Measured by increase in the real GNP per head of the population Actual economic growth is the annual percentage increase in national output, which typically fluctuates with the trade cycle Potential economic growth is the rate at which the economy would have grow if all resources were fully utilized

Consequences of economic growth

+ increase in income per head + higher level of consumption + better living standard + better social services without increasing taxes - Depletion of natural resources - Create pollution - Structural unemployment

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Privatization
For:
an increase in competition a short-term boost to government revenues a widening of share ownership

Barriers to international trade

Tariffs Quotas Embargos

Against:
public sector monopolies become private sector ones loss of economies of scale if broken up deteriorating quality of service profit is the motive and not social welfare

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