Section 3 student version
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This document provides an overview of macroeconomics concepts including national income, aggregate demand and supply, the business cycle, unemployment and inflation, and income distribution. It defines key macroeconomic goals such as economic growth and price stability. It also discusses how macroeconomic equilibrium can be achieved through fiscal and monetary policy and explores supply-side policies and models including the multiplier effect, Phillips curve and NAIRU.
Section 3 student version
- 2. What is macroeconomics?What are macroeconomic goals?How is national income measured?How can economic growth be achieved?2
- 3. What is macroeconomics?Macroeconomics is the study of a national economy.3
- 6. Two Sector Circular Flow of IncomeMonetary FlowHouseholdsRealFlowGood and Services = Output (O)Expenditure on Goods and Services(E)Wages, Rent and Profits(Y)Factors of ProductionFirmsE = O = Y6
- 7. Four Sector Circular Flow of IncomeLeakages (L)Injections (J)Saving (S)HouseholdsInvestments(I)IncomeExports(X)Imports (M)GovernmentSpending (G)ExpenditureTaxes(T)FirmsO = E = Y7Sum J = Sum L
- 8. Measuring National IncomeIncome MethodOutput MethodHouseholdsGood and ServicesWages, Rent and ProfitsExpenditure on Goods and ServicesFactors of ProductionFirmsExpenditure Method8
- 9. How is national income measured?9
- 10. How is national output measured?10
- 11. How is national expenditure measured?11
- 12. What is GDP?12
- 13. GDPGDP = Gross Domestic Product = Total Value of all Spending in an Economy = The Total Value of all final Goods and Services in an Economy regardless of who owns the productive assets.GDP = C + I + G + (X – M)13
- 14. GNPGNP = Gross National Product = Total Income Earned by a nation’s factors of production regardless of where the assets are located14
- 15. Real GDPReal GDP = Nominal GDP adjusted for inflation15
- 16. Calculating Real GDPReal GDP = Nominal GDP of year measured16X 100GDP Deflator
- 17. The Uses of National Statistics17
- 18. Limitations of the Data18
- 20. What is economic development?Economic Development is a multidimensional concept that includes poverty reduction, provision of education, health care and law and order, civil liberties and civic participation.20
- 21. Why GDP fails to accurately measure welfare21
- 22. Why GDP may understate improvements in welfare22
- 23. Why GDP may overstate welfare23
- 24. How can development be measured?GDP per capitaHuman Development Index Aims to stress the human dimension of economic growth24
- 25. How can development be measured?25
- 26. How is the HDI determined?26
- 27. How can development be measured?27
- 28. Developing and Developed 28
- 29. How can development be measured?Important Indicators of developmentInfant mortality rateMaternal mortality ratioEnrolment in each level of educationLiteracy Internet users per 100029
- 31. What is aggregate demand (AD)?Aggregate Demand is the aggregate (total) spending on goods and service in a period of time at a given price level.31
- 32. 32
- 33. What are the components of AD?C = all household consumption on durables, non-durables and servicesI = firm’s replacement investment(spending on capital to maintain productivity) or induced investment to increase productionG = all government spending X-M = spending by foreigners on exports less domestic spending on imports 33
- 34. What causes shifts in AD?34
- 35. What causes Changes in Consumption?ADADADAD35
- 36. What causes Changes in Consumption? ADADADAD36
- 37. What causes Changes in Consumption? ADADADAD37
- 38. What causes Changes in Investment?ADAD38
- 39. Demand for investment funds?39
- 40. What causes Changes in Investment? ADADADAD40
- 41. What causes Changes in Investment? ADADADAD41
- 42. What causes Changes in Investment?ADAD42
- 43. What causes Changes in Government Spending? ADADADAD43
- 44. What causes Changes in Export and iMport spending?ADAD44
- 45. What causes Changes in Export and iMport spending?ADADADAD45
- 46. What is aggregate supply (AS)?Aggregate(total) Supply isamount of goods and services that all industries will produce at a given price level.46
- 47. What is aggregate supply in the short run (SRAS)?47
- 48. What are the components of AS?48
- 49. What causes shifts in SRAS?49
- 50. What causes shifts in SRAS? ASASASAS50
- 51. What causes shifts in SRAS? ASASASAS51
- 52. What causes supply shocks? ASAS52
- 54. Shifts in AD54
- 55. Shifts in SRAS55
- 56. The Business CycleFluctuations in the growth of real output, consisting of periods of expansion and contraction called business cycles or trade cycles.56
- 57. Business Cycle57
- 62. Relationship between real GDP and Employment62
- 63. Using Diagrams to Illustrate Macroeconomic Goals 63
- 64. Using Diagrams to Illustrate Macroeconomic Goals 64
- 65. Changes in SR Equilibrium 65
- 66. Changes in AD 66
- 67. Changes in SRAS 67
- 68. Economic Scenarios 68
- 70. Recession A recession is when the economy experiences two consecutive quarters of falling GDP.70
- 72. Full employment level of output 72
- 73. Causes of Business Cycle 73
- 74. Changes in AD 74
- 75. Changes in AS 75
- 76. What is the neoclassical perspective?76
- 78. Neoclassical (Free Market) LRAS 78LRAS perfectly inelastic at Full Employment Level of Output (Ymax)Potential Output = Quantity and Quality of FOPs not Price
- 79. Why is the LRAS vertical?79
- 80. Implications of the neoclassical LRAS?80
- 82. Long-run equilibrium and Decline in AD 82
- 83. Return to Long-run equilibrium 83
- 85. Long-run equilibrium and Increase in AD 85
- 86. Return to Long-run equilibrium 86
- 87. What is the Keynesian perspective?87
- 89. Keynesian SR/LRAS89Segment 1: Spare capacity in the economy, LRAS perfectly elastic
- 90. Keynesian SR/LRASKeynes argued that as there is nothing inherent in the economy to move the SR into the LR, then SRAS = LRASNB In diagrams taking a Keynesian you may see the AS curve labeled Keynesian AS or simply LRAS as long as the diagram’s title makes clear which perspective is being adopted 90
- 91. Inflationary Gap in the Keynesian Perspective91
- 92. Full Employment Equilibrium in the Keynesian Perspective92
- 93. Economic Growth: Improved Quantity & Quality of FOPs 93
- 94. Economic Growth: Neoclassical Perspective 94
- 95. Economic Growth: Keynesian Perspective95
- 96. 96 Demand-side and Supply-side policies
- 97. Policy Alternatives to Manage the Economy97
- 98. Expansionary Policies (in recession)98
- 99. Contractionary Policies (in inflation)99
- 100. Strengths of Fiscal Policy100
- 101. Weaknesses of Fiscal Policy101
- 102. Strengths of Monetary Policy102
- 103. Weaknesses of Monetary Policy103
- 104. The Neoclassical/Monetarist ChallengeArgument that discretionary fiscal polices that try to stabilize the economy are so flawed that they actually cause instabilityAlternative policiesEnsure steady supply of moneyEnsure price and wage flexibilityFocus on supply-side policies to achieve economic growth104
- 107. Market-orientated Supply-side Policies: Objectives107
- 108. 108
- 109. Reduce Government Sector: Pros and Cons109
- 110. 110
- 111. Improving incentives : Pros and Cons111
- 112. 112
- 113. Make labor more responsive to supply and demand : Pros and Cons113
- 114. 114
- 115. Government policies to improve industry: Pros and Cons115
- 116. Shifting the SRAS and the LRAS in the AS-AD Model116
- 117. The multiplier, accelerator and crowding-out effectHL Topics117
- 120. Example of the Multiplier in Effect120Assumption 60% of additional income spent on Consumption (MPC = 0.6)The Multiplier = 1/1-MPC
- 122. The Accelerator Theory & the Combined multiplier/accelerator effectArgues that small changes in GDP produces larger changes in investment spending. These fluctuations interact with the Multiplier effect to increase the momentum of business cycle.122
- 127. Unemployment127
- 128. 128
- 129. 129
- 130. Economy at Potential 130
- 131. Types of Unemployment 131
- 132. Keynesian Remedy for Unemployment During a Recession132
- 133. Neoclassical Remedy for Unemployment During a Recession133
- 135. Eliminating Cyclical (Demand-deficient) Unemployment135
- 140. 140
- 142. 142
- 143. “Good” Deflation143
- 144. MacroeconomicsSection 3.5HL TopicsMeasuring InflationThe Phillips CurveNRU & NAIRU144
- 145. Measuring InflationThe consumer price index (CPI) compares the value of a basket of goods and services in one year with a same basket in the base year. 145
- 148. NRU = NAIRUIf governments avoid demand-side expansionary policies Non-accelerating inflation rate of unemployment is achieved (NAIRU)148
- 150. Phillips Curve150
- 151. Phillips Curve151
- 152. No-classical challenge to the Phillips Curve6% = NRUWages set to rise by at least 2% as workers expect this rate of inflationa = Labor Market at equilibrium 152
- 153. LR Phillips CurveIf expansionary policies adopted, inflation would increase to 4% or more. Real wages have fallen and firms hire additional labor. 153
- 154. LR Phillips CurveUnemployment is now below NRU at 4%. (b)Workers have fallen for the “money illusion” and slow to realize that real wages have fallen because inflation is actually over 4%. 154
- 155. LR Phillips CurveOnce workers realize real wages have fallen they will demand at least a 4% pay rise. Real wages will return to previous levels and firm will fire workers.Unemployment has returned to (c) 155
- 156. LR Phillips CurveAny attempt to to increase AD will only result in temporary changes to unemployment but increasingly high rates of inflation156
- 157. LR Phillips CurveFriedman argued that no trade off exists if governments do not use demand side policies.157
- 159. Income Distribution and EquityVertical Equity = treating people differently to achieve greater fairness e.g. people on low incomes pay less tax than people on high incomes Horizontal Equity = people should be treated the same e.g. people who have the same income should pay the same tax159
- 160. 160
- 161. 161
- 162. Progressive, Proportional and Regressive TaxationProgressive: as income increases, the fraction paid in tax increasesProportional: as income increases the fraction paid in taxes remains constantRegressive: as income increases, the fraction paid in taxes decreases162
- 163. Progressive, Proportional and Regressive Taxation163
- 164. 164
- 165. Lorenz CurvePerfect income equalityInequality of income165
- 166. Calculating Gini CoefficientGini Coefficient = A/A+B166AB
- 167. Gini CoefficientGini Coefficient = areas between diagonal and Lorenz Curve/entire area under diagonalValues closer to 0 = greater income equalityValues closer to 1 = greater income inequality167
- 168. Laffer Curve (HL Extension)168
- 169. Laffer Curve 169
- 170. ActivitySelect one of the OECD economies to study in detail over Section 3Undertake research to find the following:Real GDP for the last decadeReal GDP per Capita for the last decadeReal GDP growth for the last decadeWhat conclusions can you draw? 170
- 171. Activity Visit www.nationmaster.com or any reputable site and gather data on the various measure of development for your OECD country of focus and compare it with the developing nation you chose early in the course.171
- 172. Typical Examination Questions172These questions focus on Measuring National Income and Macroeconomics Models.Explain the possible limitations of using GDP as a measure to compare welfarebetween countries.Using the circular flow of income diagram, explain the link betweensaving and investment.Use AS/AD diagrams to explain the causes of inflation (or deflation).Identify the components of aggregate demand (or aggregate supply) and briefly explain factors which might determine these components.Evaluate the likely impact on an economy of a substantial rise (or fall) in the level of interest rates (or other components of AD)
- 173. Typical Examination QuestionsThese questions focus on inflation and deflation:What are the problems associated with measuring inflation?Explain the possible causes of a rise (or fall) in the rate of inflation in an economy.Evaluate the likely effects of a rising (or falling) rate of inflation on the performance of an economy. Explain the costs of inflation and deflation.Evaluate the view that governments should make the control of inflation their highest priorityEvaluate the possible impact on economic performance that may result from a government decision to bring inflation under control. 173
- 174. Typical Examination QuestionsThese questions focus on unemployment:Explain the different types of unemployment.Evaluate polices aimed at achieving full employment in an economy. Explain the costs of unemployment. Discuss the reasons why government find the goal of full employment difficult to achieve.174
- 175. Typical Examination QuestionsThese questions focus on monetary and fiscal policy:Discuss the strengths and weaknesses of demand-side policies. Discuss the strengths and weakness of supply-side policies.Explain the purpose of various demand-side (or supply-side) policies.175
- 176. Typical Examination QuestionsThese questions focus on income distribution:With the use of examples, explain the difference between a progressive tax and a regressive tax. With the use of examples, explain the difference between direct and indirect taxes.Explain the possible impact on the distribution of income of a government shifting its main source of tax revenue from progressive direct taxes to regressive indirect taxes.Evaluate the methods government use to redistribute income in an economy.176
- 177. Typical HL Examination QuestionsIn addition to the questions above, HL students need to prepare for the following:Explain the relationship between the Lorenz Curve and the Gini coefficient.Explain how increasing government spending can lead to crowding out.Use the Phillips curve to explain the concepts of Natural Rate of Unemployment and outline its usefulness.Explain the multiplier and the accelerator effects.Use the Laffer Curve to explain the likely impact of progressive and regressive tax systems. 177
- 178. On-Line Resources (1)Keynes and Hayek RapNationmater is a massive central data source and a handy way to graphically compare nations that compiles data from such sources as the CIA World Factbook, UN, and OECD. CIA Factbook The World Factbook provides information on the history, people, government, economy, geography, communications, transportation, military, and transnational issues for 266 world entities. Gapminder, an excellent way to visual information178
- 179. On-Line Resources (2)International Monetary Fund also provides international data.National Council on Economics Education is another excellent source of information. The organization also has worksheets to help student analyze current GDP data.TheEconomist DebatesCommanding HeightsTriple A Learning Economics Blog179