Topic 8: The Macroeconomic Framework

8.1 National Income

• Circular flow of income: shows how households and firms interact.
• Injections: investment, government spending, exports.
• Withdrawals/leakages: savings, taxes, imports.
• Equilibrium when injections = withdrawals.
• GDP: total value of goods/services produced.
• GNP/GNI: GDP + net income from abroad.
• Real vs nominal GDP: real adjusted for inflation.

 

8.2 Economic Growth

• Growth = increase in real GDP.
• Benefits: higher living standards, more jobs, better public services.
• Costs: environmental damage, inequality, inflation risk.
• Sustainable growth = growth without harming future generations.

 

8.3 Inflation

• Inflation = sustained rise in general price level.
• Demand‑pull inflation: excess demand.
• Cost‑push inflation: rising production costs.
• CPI/RPI: measures inflation via basket of goods.
• Consequences: reduces purchasing power, uncertainty, wage‑price spiral.

 

8.4 Unemployment

• Types:
• Frictional (between jobs).
• Structural (skills mismatch).
• Cyclical (due to recession).
• Seasonal (time‑based).
• Costs: loss of income, lower output, social problems.
• Policies: training, demand stimulation, subsidies, reforms.

 

8.5 Balance of Payments

• Records transactions with rest of world.
• Current account: exports/imports of goods/services.
• Capital/financial account: investment flows.
• Deficit = imports > exports; Surplus = exports > imports.

 

8.6 Macroeconomic Objectives

• Governments aim for:
• Growth.
• Low inflation.
• Low unemployment.
• Balance of payments stability.
• Redistribution of income.
• Often trade‑offs (e.g., growth vs inflation).

 

8.7 Policies

• Fiscal policy: government spending + taxation.
• Monetary policy: interest rates, money supply.
• Supply‑side policies: improve efficiency (education, deregulation, innovation).
• Exchange rate policy: manage currency value.