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Introduction to Macroeconomics

• Macroeconomics studies how entire economies function
• It analyzes broad economic factors and their interactions
• The course explores key macroeconomic concepts, measures, and policies that shape national and global economies

Learning Outcomes

• Key Concepts: Understand core macroeconomic concepts like GDP, inflation, and unemployment
• Economic Measures: Interpret and analyze economic indicators such as GDP growth and CPI
• Economic Policy: Gain insights into fiscal and monetary policy roles
• Global Context: Explore macroeconomic factors' relationship to international trade

Macroeconomics

• Imagine the economy like a giant engine
• Macroeconomists analyze the overall performance, like studying the engine's performance
• GDP (Gross Domestic Product) indicates how much the economy is producing
• Inflation shows if prices are rising too quickly, like overheating
• Unemployment rates show if the engine is stalling

Microeconomics

• Microeconomics focuses on individual interactions happening within a market (a bustling farmer's market)
• It examines how individual farmers decide how many apples to grow and their price
• It looks at how bakers decide on quantities and how prices of ingredients impact their decisions
• Consumers (shopper) make choices impacted by prices, preferences, and other factors

Microeconomics vs Macroeconomics

• Microeconomics examines consumers and businesses' decisions relating to limited resources in specific markets
• This analysis includes interactions, reaction to changes in supply, demand, and prices
• Macroeconomics studies the economy's overall performance, using broad indicators like GDP, inflation, and unemployment
• It helps understand how the economy functions

Key Macroeconomic Issues

• Economic Growth: Measures increase in economy's productive capacity. Crucial for raising living standards
• Inflation: General rise in price levels that can erode purchasing power
• Unemployment: Portion of the labor force unable to find work. High rates indicate economic inefficiency

Gross Domestic Product (GDP)

• Definition: Total value of all final goods and services produced within a country's borders in a year
• Importance: Primary indicator of a country's economic health and growth rate, used to compare economies
• Calculation: Sum of consumer spending, business investment, government spending, and net exports
• Rate of Change: Percentage change in GDP year-on-year indicates the level of economic growth

UK GDP Measure

• Q2 2021 UK GDP reached £520.8 billion, reflecting economic recovery from pandemic disruptions
• GDP growth fluctuated in preceding years due to Brexit uncertainty and global economic shifts
• Economists forecast moderate growth, contingent on post-Brexit trade agreements and global conditions

GDP Growth Rate Comparison

• Specific countries' GDP growth rates are presented for 2019, 2020, and 2021

Inflation Overview

• Definition: Sustained increase in the general price level of goods and services in an economy
• Measurement: Typically measured by changes in the Consumer Price Index (CPI) or GDP deflator
• Impact: Inflation affects purchasing power, savings, investment decisions, and overall economic stability

Consumer Price Index (CPI)

• Definition: Measures average change in prices paid by urban consumers for a market basket of goods
• Calculation: Based on surveys of consumer spending habits and price data from retailers
• Inflation rate: Rate of change of CPI
• Usage: Used to adjust wages, pensions, and government benefits for cost-of-living changes

UK Inflation Rate

• September 2021: UK inflation rate reached 3.1%, exceeding Bank of England's 2% target
• Causes: Supply chain disruptions, energy price increases, pent-up consumer demand
• Implications: Higher inflation may lead to interest rate hikes and reduced consumer purchasing power

Unemployment Concepts

• Definition: Percentage of labor force that is jobless, actively seeking work, and available to work
• Types: Frictional, structural, and cyclical unemployment
• Measurement: Typically calculated through labor force surveys and unemployment benefit claims data

UK Unemployment Trends

• June-August 2018 unemployment rate was 5.6%
• June-August 2021 unemployment rate dropped to 4.6% despite pandemic disruptions

International Trade & Finance Basics

• Exports: Goods and services sold to foreign buyers, contributing to domestic economic growth
• Imports: Goods and services bought from foreign sellers. May increase consumer choice but compete with domestic production
• Trade Balance: Difference between exports and imports. A surplus exists when exports exceed imports, and a deficit, when reversed

Balance of Payments

• Definition: Record of all transactions between a country and the rest of the world
• Components: Current account, capital account, and financial account, each tracking different types of transactions
• Importance: Reflects a country's economic health, international competitiveness, and currency demand

Current Account

• Components: Records trade in goods and services, income flows, and unilateral transfers
• Status: Current account deficit (imports exceed exports), or current account surplus (exports exceed imports)
• Calculation: Formula for calculating current account
• Significance: Large deficits often indicate economic imbalances and potential currency risks

UK Current Account Balance

• 2000-2008: Relatively stable current account deficit
• 2009-2011: Deficit widened post-financial crisis
• 2012-2017: Deficit continued to grow

Interest Rates Overview

• Definition: Cost of borrowing money, expresssed as a percentage
• Types: Nominal, real, and effective
• Importance: Influences saving, borrowing, investment decisions and overall economic activity

Central Banks and Monetary Policy

• Bank of England (UK): Sets base rate to influence broader economy, aiming for a 2% inflation target
• Federal Reserve (US): Uses federal funds rate to manage inflation and employment
• European Central Bank (Eurozone): Sets key interest rates for euro area, focusing on price stability

UK Interest Rate Trends

• 1979: Rates hit a peak of 17% due to inflation
• 1971-2021: Average rate of 7.24%
• 2020: COVID-19 impact resulted in rates cut to 0.10%
• 2024: Post-COVID recovery saw rates increase to 4%

Government Budget Basics

• Government Income: Primarily from taxes
• Government Expenditure: Public services (healthcare, education) and infrastructure, including transfer payments
• The Treasury: Manages national finances by allocating resources

UK Public Sector Borrowing

• Pre-2008: Relatively stable borrowing
• 2008-2010: Sharp increase due to the financial crisis
• 2010-2020: Gradual reduction through austerity measures

The Circular Flow Model

• Households provide factor services to firms and spend on goods/services received from firms
• Firms produce goods and services, paying factor incomes and receiving revenue from sales, thus completing the cycle

Injections and Withdrawals

• Injections: Investment, Government Spending, Exports
• Withdrawals: Savings, Taxes, Imports

Types of Economic Spending

• Consumption (C): Household spending on goods and services (largest component)
• Investment (I): Business spending on capital goods, equipment, structures, and inventories
• Government Spending (G): Public sector spending on goods and services, including consumption and investment

International Trade Components

• Exports (X): Goods and services sold to foreign buyers
• Imports (M): Goods and services bought from foreign buyers
• Net Exports (X-M): Difference between exports and imports. Can be positive (surplus) or negative (deficit)

Aggregate Demand Formula

• Components: AD=C+I+G+(X-M) (consumption + investment + government spending + net exports)
• Significance: Represents total planned expenditure in an economy
• Policy Implications: Changes in components can be targeted by fiscal and monetary policies

Aggregate Supply

• Definition: Total quantity of goods and services that firms are willing to produce at various price levels
• Short-run AS (Upward sloping): Reflects changing production costs as output changes
• Long-run AS (Vertical): Represents potential GDP when resources are fully employed

Macroeconomic Equilibrium

• Definition: Point where aggregate demand equals aggregate supply
• Short-run Equilibrium: Intersection of aggregate demand and short-run aggregate supply
• Long-run Equilibrium: Economy operates at potential GDP

Fiscal Policy

• Definition: Use of government spending and taxation to influence the economy
• Expansionary Policy: Increases government spending or reduces taxes to stimulate economic growth
• Contractionary Policy: Decreases government spending or increases taxes to slow economic growth and inflation

Monetary Policy

• Definition: Central bank actions to control money supply and interest rates
• Tools: Open market operations, reserve requirements, discount rate adjustments
• Goals: Price stability, full employment, and sustainable economic growth

Economic Growth and Development

• Economic Growth: Increase in an economy's productive capacity over time, measured by GDP growth rate
• Economic Development: Broader concept, including improvements in living standards, education, and healthcare
• Sustainable Growth: Balances economic expansion with environmental protection and social equity