Macroeconomics Flashcards
(14 cards)
What is macroeconomics?
is the brand of economics that studies individual national economies and/or the global economy. The name comes from the Greek Word Makros, which means large.
It is the study of the whole economy.
It is concerned with analysing the forces which drives the aggregate output being generated by the productive resources of a country.
Aggregate output is generated per period of time and is measured by GDP. Macroeconomists build aggressive and simplified models of the economy.
Why is macroeconomics important for a business?
It is essentially all bout the state of the overall economic environment in why they have to do business e.g. 5 forces - Brexit.
E.g. COVID 19 pandemic, profitability was down (but with a exceptions like PPE), firms closed factories/shops and make people redundant, some firms went bankrupt
What are some examples of troubled economies?
recent spell of increased inflation and the so called ‘cost of living’ crisis. Surge in inflation was small in UK relative to the experiences of troubled economies like Argentina (288% in March 2025), Lebanon and Zimbabwe (2200% in March 2007, November 2008 it was 89.7 six trillion %) in recent years. (or historically like Germany in 1920s
What are the major macroeconomic issues?
- inflation
- economic (income) growth
- unemployment
- balance of payments and exchange rates
What questions can macroeconomics help to develop answers to?
Why are we on average richer today than 100 years ago?
Why is there unemployment in our society?
Other general questions as well
What does macroeconomic issues mean?
can create a more difficult business environment (that affects all markets to some extent)
for example, when there is high inflation, product prices change rapidly and money loses its value.
- This adds friction to markets e.g. printing more price labels, making it harder and more expensive for firms to operate
- There is considerable uncertainty and associated costs because the environment is a changing and developing situation.
- A company faces higher costs, so either raises its own selling prices (and risks lower sales) or finds it profit margins squeezed.
In the extreme we can end up with market failure.
How does high inflation make it hard to borrow money to invest?
$100 borrowed today is usually paid back with interest, but that is only viable if the rate of interest is enough to compensate for the rate of inflation to preserve the real value of the loan.
If inflation is 100% than means repaying at least $200.
What doe governments do in macroeconomic policy?
Government can only control various intermediate variables - money, supply, taxes, gov expenditure.
Sometimes governments outsource control of relevant intermediate variables to non-political bodies - interest rates controlled by Bank of England.
What do intermediate variables do?
Intermediate variables often have contradictory impacts on the different macroeconomic issues.
These variables can directly affect business as well as the environment in which they operate e.g. higher interest rates mean firms must pay more when they borrow money to invest.
What is gross domestic product?
one of the most common macroeconomic issues you will come upon/see is the idea of GDP.
GDP is the market value of all the final goods and services produced within a country in a given time period.
Calculating GDP is one the challenges of macroeconomics?
What are the 3 ways to calculate GDP?
- Adding total value of output of goods and services produced by firms in the economy.
- Adding the total amount of household income generated from the sale of this output
- Adding up the total amount of expenditure of this output.
Example of a supply chain for wooden tables?
- Metal supplier (sells meta £500)
- tool makers (transforms metal into lathes and sells lathes £1000)
- table maker (wood into tables and sells tables £2000)
- wood supplier (sells wood £1000)
- furniture retailer (adds mark up and sells tables £2500)
Total of all transactions that contribute to GDP = £3500
What is GDP useful for?
it is useful and powerful but it is also criticised as being an imperfect measure of welfare for several reasons.
- GDP is an aggregate measure (GDP per capital is an average measure) so doesn’t account for income inequalities
- It doesn’t consider price differences between countries
- Doesn’t account for household production, underground economic activity, leisure time, environment quality or quality changes in products produced.
What are the various adjustments to GDP that offer further insights?
- using PP adjustment
- needs to distinguish between nominal and real GDP
- utilise other measure of wealth such as GNP
There are broader measures of economic well being like HDI from the UN
