AS Macro Revision

Macroeconomics, Macro Objectives and the Circular Flow of Income

Spring 2014

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What is Macroeconomics?•M

acroeconomics considers the behaviour of the economy as a whole

National Economy

•Macroeconomics studies connections between different countries in the world economic and financial system

External factors

•Macroeconomics includes looking at the effects of policies such as a change in taxation or a change in interest rates

Macro policies

•Macroeconomics involves studying inflation, economic growth, human development, trade and globalisation

Key topics

The Four Key Parts of the Circular Flow Model

External Sector

HouseholdsHouseholds receive income through wages and salaries from their jobs and from their investments and buy the output of firms (this is known as consumer spending)

BusinessesBusinesses hire land, labour & capital inputs when making products for which they pay wages and rent. Firms receive payment from consumers (creating revenue and profit)

GovernmentGovernment collects taxes (T) to fund spending on public services such as education, healthcare and defence. Government spending is labelled (G)

The UK buys imports from other countries, (M) and overseas businesses and consumers buy UK products – known as exports (X)

Households Government Firms

Purchases of goods and services

£Demand

Wages, dividends, interest, profits and rent

£Incomes

Taxes

Social Transfers

Govt Purchases

Taxes

The Domestic Circular Flow of Income & Spending

The Domestic Circular

Flow

HouseholdsGovernment

Firms

Households Government Firms

Purchases of goods and services

£Demand

Wages, dividends, interest, profits and rent

£Incomes

Taxes

Social Transfers

Govt Purchases

Taxes

Rest of the World

Imports ExportsThe External Trade Sector

of the Economy

What are the key objectives of macroeconomic policy?

Price Stability – i.e. Low Positive Inflation

A Sustainable Growth of Real GDP (National

Output)

Falling Unemployment / More Jobs

Higher Average Living Standards (Income per

capita)

Improved Global Competitiveness / Trade

Balance

A More Equitable Distribution of Income and

Wealth

The State of the UK Economy 2009-2014

2014 data is a forecast (Jan 2014) 2009 2010 2011 2012 2013 2014

Real GDP - % change -5.2 1.7 1.1 0.1 1.4 2.4

Unemployment rate - % of labour force 7.6 7.9 8.1 7.9 7.8 7.5

Fiscal balance - %of GDP -11 -10 -8.0 -6.2 -6.9 -5.9

Consumer price inflation – per cent 2.2 3.3 4.5 2.8 2.6 2.4

Current account balance (BoP) - % of GDP -1.4 -2.7 -1.5 -3.8 -3.4 -2.5

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