Unit 2 Macroeconomics The ‘Big’ Picture

What is it? Macroeconomics considers the economy as a whole – this is the total amount of different goods and services produced by all businesses and the government sector Key performance indicators Objectives Policy instruments

What are objectives and instruments? Objectives are the aims or goals of government policy Instruments are the means by which these aims might be achieved

UK Macroeconomic Policy Objectives Stable low inflation Sustainable growth Improvements in productivity High employment Rising living standards Financial stability

Policy Instruments Monetary policy –changes to interest rates, the money supply, access to credit and also changes to the value of the exchange rate Fiscal policy – changes to government taxation, spending and borrowing Supply-side policies designed to make markets work more efficiently

What sectors make up an economy? nHouseholds nFirms nGovernment nInternational

The Circular Flow of Income The interdependence of goods markets and factor markets

FIRMS (suppliers of goods and services, demanders of factor services) HOUSEHOLDS (demanders of goods and services, suppliers of factor services) The interdependence of goods and factor markets

Q1Q1 P1P1 QF2QF2 PF2PF2 Q2Q2 P2P2 PF1PF1 QF1QF1 D2D2 D2D2 P Q P Q£ £ ££ Factor services Goods Factor services S S D1D1 D1D1 (1) Consumer demand (1) Consumer demand (4) Factor supply (4) Factor supply (3) Factor demand (3) Factor demand (2) Producer supply (2) Producer supply O O Multiplier effect

The circular flow of income Consumption, injections, withdrawals and equilibrium

Need a whole A4 page for this diagram Need it to be landscape Start off on the far left side….. Need lots of space for the diagram to ‘grow’….

Factor payments Factor payments Consumption of domestically produced goods and services (C d ) Consumption of domestically produced goods and services (C d ) The circular flow of income Firms Households

Factor payments Factor payments Consumption of domestically produced goods and services (C d ) Consumption of domestically produced goods and services (C d ) Investment (I) Government expenditure (G) Government expenditure (G) Export expenditure (X) Export expenditure (X) BANKS, etc Net saving (S) Net saving (S) GOV. Net taxes (T) Net taxes (T) ABROAD Import expenditure (M) Import expenditure (M) The circular flow of income WITHDRAWALS INJECTIONS

Key terms… Injections = I + G + X Withdrawals = S + T + M

Circular Flow of Income – what if…. What if Injections* are greater than withdrawals? *Injections = I + G + X Multiplier effect

What if withdrawals* are greater than Injections? *Withdrawals = S + T + M

Government Macro Economic policies… nLook at managing injections and withdrawals to allow a positive economic growth of 2% per year. nThe Govt can achieve this either by nreducing withdrawals nor by increasing injections

National Income Measuring economic growth

National Growth nNational Income = all incomes from FoP are added (from Firms to Households) nNational Product = all g & s produced (by firms) nNational Expenditure (AD) = all expenditure on output is added.

What’s the difference GDP v GNP

GDP measures the value of output produced within the domestic boundaries of the UK over a given time period. GDP includes the output of the many foreign owned firms that are located in the UK following the high levels of foreign direct investment in the UK economy over many years. GNP measures the final value of output or expenditure by UK owned factors of production whether they are located in the UK or overseas. Many foreign firms have set up production plants in the UK whilst UK firms have expanded their operations overseas and become multinational (or trans- national) organisations.

Key Terms needed….. Real & Nominal

Nominal Nomianal or current GDP looks at the monetary value

Real Real takes into account of inflation

Complete the task on the sheet… current prices (1995=100) Price Index (1995=100) Real GDP (1995=100)

Homework… for Wednesday News article – research an article from a reputable source: BBC Financial Times Guardian Independent The Times The Economist Article must be on one of the following topics… UK inflation UK employment / unemployment UK interest rates UK economic growth Analyse the key issues raised in the article.