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Unit 2: Macroeconomic Performance and Policy

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  1. 2.3.1 - Measures of economic performance

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

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

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

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

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

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

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

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

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

    10. The concepts of inflation, deflation and disinflation.

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

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

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

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

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

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

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

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

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

    20. The distinction between unemployment and underemployment.

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

    22. The significance of net migration for employment and unemployment.

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

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

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

  2. 2.3.2 - Aggregate demand (AD)

    1. The concept of AD. characteristics

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

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

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

    5. The relationship between savings and consumption.

    6. The definition of the 'savings ratio'.

    7. Causes and effects of changes in the savings ratio.

    8. The distinction between gross investment and net investment.

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

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

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

    12. 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.

  3. 2.3.3 - Aggregate supply (AS)

    1. The concept of AS. characteristics

    2. The AS curve. of AS

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

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

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

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

  4. 2.3.4 - National income

    1. The circular flow of income.

    2. The distinction between income and wealth.

    3. The distinction between injections and withdrawals. withdrawals

    4. Injections:; investment; government expenditure; exports.

    5. Withdrawals:; savings; taxation; imports.

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

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

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

    9. The multiplier and multiplier process.

    10. 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).

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

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

  5. 2.3.5 - Economic growth

    1. 2.3.5.1adistinction between actual and potential growth

      The distinction between actual and potential growth.

    2. 2.3.5.1bActual growth caused by an increase in the components of AD

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

    3. 2.3.5.1cimportance of international trade for export-led growth

      The importance of international trade for export-led growth.

    4. 2.3.5.1dCauses of potential growth: • domestic investment and foreign direct investment (FDI) •

      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.

    5. 2.3.5.1eimportance of productivity for the rate of economic growth

      The importance of productivity for the rate of economic growth.

    6. 2.3.5.2aPossible benefits of growth: • higher living standards • lower unemployment • increased

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

    7. 2.3.5.3aPossible costs of growth: • opportunity costs • environmental costs • balance of trade

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

    8. 2.3.5.4adifference between actual growth rate and long-term trends in growth

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

    9. 2.3.5.4bdistinction between positive and negative output gaps

      The distinction between positive and negative output gaps.

    10. 2.3.5.4cCharacteristics of positive and negative output gaps

      Characteristics of positive and negative output gaps.

    11. 2.3.5.4dDifficulties of measuring output gaps

      Difficulties of measuring output gaps.

  6. 2.3.6 - Macroeconomic objectives and policies

    1. Economic growth. objectives

    2. Low and stable rate of inflation.

    3. Low unemployment.

    4. Balance of payments equilibrium on current account.

    5. Balanced government budget.

    6. Greater income equality.

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

    8. Economic growth and protection of the environment. objectives

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

    10. Economic growth and income equality.

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

    12. 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.

    13. 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.

    14. Strengths and weaknesses of different supply-side policies.

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

    16. Fiscal policy instruments:; government spending and taxation.

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

    18. 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.

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