Unit 2: Macroeconomic Performance and Policy

2.3.1.1arate of change of real Gross Domestic Product (GDP) as a measure of economic growth and

The rate of change of real Gross Domestic Product (GDP) as a measure of economic growth and living standards.

2.3.1.1bGross National Income (GNI) as an alternative measure of national income

Gross National Income (GNI) as an alternative measure of national income.

2.3.1.1cdistinction between the following measures of GDP/GNI: • real and nominal • total and

The distinction between the following measures of GDP/GNI:; real and nominal; total and per capita; value and volume.

2.3.1.1dComparison of GDP/GNI rates of growth between countries and over time

Comparison of GDP/GNI rates of growth between countries and over time.

2.3.1.1econcept of Purchasing Power Parities (PPPs) in making international comparisons of real

The concept of Purchasing Power Parities (PPPs) in making international comparisons of real GDP/GNI.

2.3.1.1fdistinction between positive economic growth rates and negative economic growth rates

The distinction between positive economic growth rates and negative economic growth rates.

2.3.1.1gconcept of 'recession' as two consecutive quarters of negative economic growth

The concept of 'recession' as two consecutive quarters of negative economic growth.

2.3.1.1hlimitations of using GDP/GNI to compare living standards between countries and over time

The limitations of using GDP/GNI to compare living standards between countries and over time.

2.3.1.1iNational happiness and wellbeing: • indicators of national happiness and wellbeing •

National happiness and wellbeing:; indicators of national happiness and wellbeing; the relationship between real incomes and subjective happiness.

2.3.1.2aconcepts of inflation, deflation and disinflation

The concepts of inflation, deflation and disinflation.

2.3.1.2bCalculating inflation using a consumer price index (CPI), including role of weighted

Calculating inflation using a consumer price index (CPI), including role of weighted basket of goods and services.

2.3.1.2cLimitations of the CPI as a measure of the rate of inflation

Limitations of the CPI as a measure of the rate of inflation.

2.3.1.2dproducer (wholesale) price index as an indicator of future trends in the rate of

The producer (wholesale) price index as an indicator of future trends in the rate of inflation.

2.3.1.2eCauses of inflation: • demand-pull • cost-push • excessive growth of money supply

Causes of inflation:; demand-pull; cost-push; excessive growth of money supply.

2.3.1.2fCauses of deflation: • falling aggregate demand (AD) • increase in aggregate supply

Causes of deflation:; falling aggregate demand (AD); increase in aggregate supply (AS); fall in the money supply.

2.3.1.2gEffects of inflation and deflation on: (continued) • Consumers • the government • firms

Effects of inflation and deflation on: (continued); Consumers; the government; firms; workers; income distribution; investment; competitiveness; the current account of the balance of payments.

2.3.1.3aunemployment is measured, using the International Labour unemployment Organization

How unemployment is measured, using the International Labour unemployment Organization (ILO) definition.

2.3.1.3bcauses of unemployment: • frictional • seasonal • structural • demand deficiency • real

The causes of unemployment:; frictional; seasonal; structural; demand deficiency; real wage inflexibility.

2.3.1.3ceffects of unemployment on: • consumers • firms • workers • public finances • resource

The effects of unemployment on:; consumers; firms; workers; public finances; resource utilisation and production possibility frontier; society.

2.3.1.3ddistinction between unemployment and underemployment

The distinction between unemployment and underemployment.

2.3.1.3esignificance of changes in rates of employment, unemployment and economic inactivity

The significance of changes in rates of employment, unemployment and economic inactivity.

2.3.1.3fsignificance of net migration for employment and unemployment

The significance of net migration for employment and unemployment.

2.3.1.4aComponents of the balance of payments, with particular payments reference to the

Components of the balance of payments, with particular payments reference to the current account.

2.3.1.4bdistinction between deficits and surpluses in the trade in goods and services balance

The distinction between deficits and surpluses in the trade in goods and services balance.

2.3.1.4cdistinction between balance of payments deficits and surpluses on the current account

The distinction between balance of payments deficits and surpluses on the current account.

The concept of AD. characteristics

Components of aggregate demand: of AD; C + I + G + (X-M) =; the AD curve.

The distinction between a movement along, and a shift of, the AD curve.

Influences on consumption:; disposable income; interest rates; consumer confidence; level of welfare payments; wealth effects; availability of credit.

The relationship between savings and consumption.

The definition of the 'savings ratio'.

Causes and effects of changes in the savings ratio.

The distinction between gross investment and net investment.

Influences on investment:; the rate of economic growth; interest rates; business confidence and expectations; availability of credit; tax on company profits.

Government policy to promote investment:; tax relief; subsidies; reductions on the rate of corporation tax.

Influences on government expenditure: expenditure (G); fiscal policy; the level of economic activity; correction of market failures; political priorities.

The impact on the net trade balance of changes in: (X-M); real income; the exchange rate; the state of the global economy; degree of protectionism; non-price factors.

The concept of AS. characteristics

The AS curve. of AS

The distinction between a movement along and a shift of the AS curve.

Factors influencing SRAS. Changes in: (SRAS); costs of raw materials and energy; exchange rates; tax rates.

Different shapes of AS curve: (LRAS); Keynesian; classical.

Factors influencing LRAS. Changes in:; the state of technology; productivity; education and skills; government regulations and tax; demography and net migration; competition policy.

The circular flow of income.

The distinction between income and wealth.

The distinction between injections and withdrawals. withdrawals

Injections:; investment; government expenditure; exports.

Withdrawals:; savings; taxation; imports.

The impact of net injections into, and net withdrawals from, the circular flow of income.

The concept of equilibrium level of real national output. of real output

Causes of changes in equilibrium real national output, as a result of shifts in AD and/or AS curves.

The multiplier and multiplier process.

Marginal propensities and their effects on the multiplier:; the marginal propensity to consume (MPC); the marginal propensity to save (MPS); the marginal propensity to tax (MPT); the marginal propensity to import (MPM).

Calculations of the multiplier using the formula 1/(1-MPC) and 1/MPW, where MPW = MPS + MPT + MPM.

The significance of the multiplier for shifts in AD and the level of economic activity.

The distinction between actual and potential growth.

Actual growth caused by an increase in the components of AD.

The importance of international trade for export-led growth.

Causes of potential growth:; domestic investment and foreign direct investment (FDI); innovation; growth in size of labour force, including net migration; the degree of competition.

The importance of productivity for the rate of economic growth.

Possible benefits of growth:; higher living standards; lower unemployment; increased profits for firms; higher levels of investment; increased tax revenues; improved public services.

Possible costs of growth:; opportunity costs; environmental costs; balance of trade deficits; increased inequality; inflation.

The difference between actual growth rate and long-term trends in growth.

The distinction between positive and negative output gaps.

Characteristics of positive and negative output gaps.

Difficulties of measuring output gaps.

Economic growth. objectives

Low and stable rate of inflation.

Low unemployment.

Balance of payments equilibrium on current account.

Balanced government budget.

Greater income equality.

Inflation and unemployment, including the short-run Phillips between curve. macroeconomic

Economic growth and protection of the environment. objectives

Inflation and equilibrium on the current account of the balance of payments.

Economic growth and income equality.

Supply-side policies designed to increase productivity, supply-side competition and incentives. policies

Free market policies:; deregulation of product and labour markets; privatisation; reduction in taxation; changing the levels of welfare payments; cutting the costs of bureaucracy for firms.

Interventionist policies:; investment in education, training and skills; incentives to encourage investment: tax incentive or subsidies; infrastructure investment; finance for business start-ups; regional policy.

Strengths and weaknesses of different supply-side policies.

Demand-side policies: demand-side; the distinction between fiscal and monetary policy policies; the distinction between reflationary and deflationary policies.

Fiscal policy instruments:; government spending and taxation.

Monetary policy instruments:; interest rates; asset purchases to increase money supply (quantitative easing); changes in lending criteria; reserve asset (liquidity) requirements.

The role of central banks in the conduct of monetary policy:; implementation of monetary policy; achieving an inflation target; as banker to the government; as banker to the banks - lender of last resort.

Evaluate the strengths and weaknesses of different demand-side policies.