An Introduction to Macroeconomics

Macroeconomics is a branch of economics that studies economies ‘as a whole’. Macroeconomics policies study how an economy functions on a regional or national level.

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The Aims of Macroeconomics Policy

There are three primary aims of a macroeconomics policy:

Low Unemployment

This is a general increase in the rate of employment and is usually measured in the unemployment rate % for a particular region or country.

Non-Inflationary GDP Growth

This indicates a rise in the economy’s real output, or real GDP. It can be measured by calculating the aggregate expenditure within the economy.

Low Inflation

This aim calls for stability and a reasonable increase in prices. It can be measured by calculating the inflation rate.

Hopefully, you are clear on so far on what is microeconomics. Now, we will move to the next part of this topic  and learn about GDPA.

Gross Domestic Product and Aggregate Demand

Gross Domestic Product:

It is the total market value of the economy’s aggregate output within a given period of time.

Aggregate Demand:

It is a measure of the total demand within an economy. Alternatively, the aggregate demand is the total expenditure for an economy over a period of time.

The Calculation of Gross Domestic Product (GDP)

The gross domestic product of a country can be derived using four key determinants:

Consumption

Consumption constitutes the largest component of the gross domestic product. Essentially, it refers to the aggregate number of products and services purchased by the local population. Some of the factors that influence consumption include:

consumer wealth: the greater the consumer’s wealth, the higher the spending of the consumer.

Consumer expectations:

the forecasts about future price changes have a direct impact on existing consumer spending.

Savings rate:

The higher the rate of savings, the lower the rate of consumption. In this way, consumers will be more inclined to save funds in order to earn greater returns on their savings.

Personal tax

The higher the rate of taxation, the less the customer will be inclined to spend on products and services.

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Investment

Investment is the capital or commercial expenditure or purchase of new assets, which will deliver benefits in the future. In order to establish business activity, it is important to invest in assets such as land and property, equipment, and inventory.

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The investment can be impacted by:

The availability of finance:

When business corporations have convenient and unrestricted access to credit, finance, and investments are more readily available.

Profit expectations:

When investors have favorable expectations about a high return on their investment, they are more likely to invest. Their expectations depend on the potential economic conditions, taxation rules, and the technology trends.

Interest rates:

The level of money supply or interest rate impacts the level of investment.

Government Spending

government spending refers to the gross investment or consumption investment by the government, funded by tax money or borrowing funds. Some examples include the receiving of foreign aid and the provision of public services such as infrastructure, healthcare, and education.

Government spending may be influenced by:

Political trends:

Political agendas are likely to influence government spending on public services and programs, thereby impacting resource allocation.

Availability of funds:

When the government has access to a variety of funding sources, such as tax money, borrowings, and foreign aid, there is a greater chance of investment.

Exports – Imports

This equation takes into account the difference between the exports and imports of the domestic economy. Exports are the goods and services produced within the country and sold to foreign countries, while imports are goods and services purchased from foreign economies.

There are multiple factors that influence the value of net imports and exports, including

Exchange rates:

Favorable exchange rates between two countries may impact imports and exports. 

Foreign income:

A rise in the income of a foreign country may potentially increase exports.

Trade restrictions (taxes and tariffs): Restrictions on international trading activities have a direct influence on the demand, availability, and affordability of imports and exports.

The Final GDP Equation

Keeping the above-mentioned determinants in mind, the calculation of GDP comes down to the following equation:

GDP =Consumption (C) + Investment (I) + Government Spending (G) + Exports – Imports 

Gross National Product

Gross National Product takes into account the total value of all finished goods and services produced by a country’s population within a financial year. In other words, it is the aggregate economic output of a country’s residents and comprises international cash flows.

There are two key determinants of the Gross National Product (GNP):

a) The Income Remitted from Foreign Countries

The word ‘remittance’ means a sum of money that is sent to another party, in a foreign country. The income remitted from foreign countries is the income received back home from international countries. This transfer of funds makes a valuable contribution to the home economy.

An example of income remitted from another country will be receiving a sum of foreign currency from a friend or relative who works abroad.

b) The Income Remitted to Foreign Countries

The income remitted to other countries is the exact opposite of the aforementioned concept. Sending a remittance to another country means withdrawing your income from the economy and transferring it to a foreign economy. 

Conversely, income is remitted to another country when an individual working and living abroad sends money back to his home economy.

Understanding the Concept of Aggregate Supply

Also referred to as the total output, aggregate supply is the total amount of goods (including services) supplied by businesses within a country at a given price level. 

There are three key determinants of aggregate supply.

a) Productivity:

This is the potential level of production that is attainable from the given resources. The availability of resources, methods of working and technological advancements impact the level of productivity.

b) Input Prices:

These are the costs of all resources and materials required to attain the finished product 

c) Legal/Institutional Environment:

This determines the regulatory and legal factors, including taxes, new legislation, and subsidies, that could increase or decrease the levels of production. The link between aggregate demand and aggregate supply brings about a significant change in the economy. The intersection between the two is known as the equilibrium GDP. It is reached when the aggregate demand equals the aggregate supply.

Economic Cycles

An economic cycle is often called the ‘business cycle’. It deals with the fluctuating state of an economy by depicting periods of ‘contraction’ and ‘recession’.

There are four key phases of the economic cycle, and they are largely measured in the context of GDP growth.

Expansion

During this phase, there is a general increase in economic factors including demand, supply and consumer income. During this phase, businesses are doing well, people are getting jobs, and everyone feels optimistic.

Peak

The peak is the phase within the economic cycle right before economic indicators start to slow down. The economy is expected to ‘overheat’ here, implying that prices are starting to rise. However, businesses cannot continue to go up forever and may fail to fulfill all consumer demands.

Contraction

During the third phase, the economy is clearly shrinking. Contraction may also be referred to as the ‘recession’ or ‘decline’ phase. People might lose their jobs, and businesses might struggle.

Trough

This phase in microeconomics depicts the least level of economic activity. Supply and demand are expected to decline drastically, and unemployment levels to go high. However, this is followed by another expansion phase.

The effects of the four phases of the economic cycle are emphasized in the table below.

Economic cycle stage

Other names

Peak

Boom

Contraction

Recession, Decline

Trough

Depression, Slump

Expansion

Growth, Recovery

GDP growth

Maximum

Declining

Minimum

Increasing

Employment level

Maximum

Declining

Minimum

Increasing

Inflation

Maximum

Declining

Minimum

Increasing

Availability of credit

High

Declining

Low

Increasing

Market Confidence

High

Declining

Low

Increasing

Consumption

High

Declining

Low

Increasing

Source. ACCA Study Hub

The Aims of Macroeconomics Policy

There are three pivotal aims of the macroeconomics policy:

Economic Growth

One of the key purposes of economic policy is to ensure sustainable economic growth. This implies that the population within an economy is able to work, make money and thereby enhance quality of life. Policymakers employ various measures, such as promoting investment, supporting education, and maintaining stable financial conditions, to nurture sustained economic growth.

Controlled Inflation

Inflation can be explained as a rise in the prices for products and services over a period of time. Controlling inflation involves ensuring that the general level of prices remains stable and does not rise too rapidly. Policymakers employ tools such as interest rate adjustments and government spending to achieve this goal, thereby promoting economic stability.

Full Employment

The concept of ‘full employment’ entails that all members of the population who are prepared to work with the necessary skills have some source of employment. In other words, full employment is the absence of cyclical unemployment in an economy.

It should be understood, however, that full employment cannot equate to zero employment. The country will still have a considerable proportion of its workforce unemployed. There are multiple factors to consider, such as the time it takes to search for a job, or having to upskill or relocate.

Was this blog a helpful revision material for you on what is microeconomics mirchawala? Be sure to check out other blog posts covering different sections of the FBT syllabus outline.

The world is constantly changing and it pays to be informed. We explore the factors that influence global economic confidence and social mobility.- ACCA global 

Frequently Asked Questions (FAQ’s)

Q1. What is microeconomics?

The study of how people, households, and businesses make decisions and distribute resources is known as microeconomics. It mostly addresses personal and financial matters and is applicable to markets for products and services.

Q2. What is microeconomic and example?

The study of economic activity in individuals and businesses is known as microeconomics. A person making a budget to improve their financial situation and a company reducing expenses to increase profit are two examples.

Q3. What is the difference between GDP and GNP?

GDP (Gross Domestic Product) measures the total economic output within a country’s borders, including both residents and foreign entities. GNP (Gross National Product), measures the total economic output generated by a country’s residents, regardless of whether they are within the country or abroad. 

Q4. How do you calculate GDP?

GDP = C + I + G + (X – M)

Where:

C represents consumer spending

I represent investments in businesses and capital goods

G represents government spending

X represents exports of goods and services

M represents imports of goods and services

Q5. From where can I learn more about macroeconomic policy aims?

Simply enroll in Sir Owais Mirchawala’s course for FBT and gain detailed insights about macroeconomics policy aims.

Q4. Should we consider GDP the same as aggregate demand?

The two terms are often used interchangeably and are considered to be equal in the long run.

-Written by Inbisaat Ahmed – shining student of Mirchawala’s Hub Of Accountancy

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