LEARNING OBJECTIVES
What you will be able to do
- explain government aims and possible conflicts
- interpret growth, unemployment and inflation measures
- evaluate fiscal, monetary and supply-side policies
- analyse redistribution and policy consequences
AT A GLANCE
INTRODUCTION · THE BIG IDEA
Measure national performance and evaluate policies for growth, employment, prices and distribution.
Macroeconomics looks at the whole economy. Governments usually seek growth, low unemployment, price stability, external balance and fairer income distribution, but these aims can conflict.
Policies work through chains of effects and time lags. Evaluation should ask how large, how fast, for whom and under what economic conditions.
SECTION 01
Macroeconomic aims and growth
Real GDP removes price change; real GDP per head also adjusts for population and is a rough guide to average material living standards. Growth can increase employment, income and tax revenue, but may create inflation, inequality, resource depletion and pollution.
Actual growth uses idle resources, while potential growth expands productive capacity through investment, education, technology or more resources. Recessions reduce output and can create cyclical unemployment.
SECTION 02
Employment and unemployment
Unemployment includes people able, available and seeking work but without jobs. Types include frictional, structural, cyclical and seasonal unemployment. Measures may use claimant counts or labour-force surveys and can miss discouraged workers or informal employment.
Unemployment lowers income and output and increases government benefit spending, while prolonged unemployment can erode skill and wellbeing. Very low unemployment can produce wage pressure and labour shortages.
| Type | Cause | Targeted response |
|---|---|---|
| Structural | skills or location mismatch | training and mobility support |
| Cyclical | low total demand | expansionary demand policy |
| Frictional | time between jobs | better job information |
SECTION 03
Inflation and price stability
A consumer price index tracks the cost of a weighted basket. Demand-pull inflation occurs when total demand grows faster than capacity; cost-push inflation follows rising production costs. Deflation is a sustained fall in the general price level.
Moderate inflation redistributes purchasing power: borrowers may gain and fixed-income savers may lose. High or unpredictable inflation creates uncertainty, menu costs, wage conflict and weaker export competitiveness.
Inflation from an index
- The CPI rises from 125 to 131.
- Increase = 6.
- Inflation = 6 ÷ 125 × 100%.
Answer: Inflation rate = 4.8%.
SECTION 04
Fiscal, monetary and supply-side policy
Fiscal policy changes government spending and taxation. Expansionary policy can raise demand and employment but may cause inflation, debt or imports. Monetary policy changes interest rates or money conditions; higher rates can reduce borrowing and demand but affect exchange rates and investment.
Supply-side policies raise productive capacity or market efficiency through education, infrastructure, tax incentives, labour-market reform, privatisation or deregulation. They may take years, cost public money or increase inequality.
Progressive taxes take a larger percentage from higher incomes; proportional taxes take the same percentage; regressive taxes take a larger percentage of low incomes. Benefits and services also redistribute income.
| Policy | Typical expansionary action | Main channel |
|---|---|---|
| Fiscal | raise spending or cut tax | aggregate demand |
| Monetary | lower interest rate | borrowing, saving and exchange rate |
| Supply-side | improve skills or infrastructure | productive capacity and cost |
QUICK CHAPTER SUMMARY
The ideas to carry forward
- Real and per-head measures are more informative than nominal totals alone.
- Unemployment and inflation have different causes requiring different policies.
- Fiscal and monetary policies mainly influence demand.
- Supply-side policies target capacity but often take longer.
QUICK REVISION CHECKLIST
Can you do each of these without your notes?
- explain government aims and possible conflicts
- interpret growth, unemployment and inflation measures
- evaluate fiscal, monetary and supply-side policies
- analyse redistribution and policy consequences