Chapter 1. Measuring economic performance Part I. Economic performance.When monitoring of overall performance, it means focusing on the macroeconomic aggregates. ‘Aggregate’ in this case mans ‘total’: for example, total spending in an economy or a total supply.
Macroeconomics studies the interrelationships between variables in economy at an aggregate level. Economics variables need to be measured all the time to have an up-to-date information about the current economic situation. Economists use values to measure the variables. There are two types of values:
• Nominal
• Real
Nominal value bases only on current prices, while real value also includes changes of prices through time.
Part II. Inflation
Inflation is a sustained increase in the general price level and is measured by the consumer price index (CPI), which is one of the most important price index in the UK. In other words, the rate of inflation is measured by percentage change in the level of consumer prices. Also there is an alternative measurement of inflation – retail price index (RPI), which used to be the traditional measurement of inflation in the UK for many years. RPI is a measure of the UK’s average level of prices. Part III. Unemployment
Unemployment monitors the number of people who are looking for work, available for work, not in work and are claiming for the benefit – Jobseeker’s Allowance. The number of people claiming for this benefit each month is called claimant count of unemployment. Another way to measure unemployment is ILO (International Labour Organisation) unemployment rate, which is based on Labour Force Survey. ILO unemployment rate measures the percentage of the workforce who are without jobs, but willing to work, available for work and looking for work.
Part IV. The circular flow of income, expenditure and output
GDP plays a key part in the economy of every country. It is the total market value of all final goods and services produced within the country in a given period of time. It can be measured using the following model.
The circular flow of income, expenditure and output is a simple model representing actions happening in an economy and describing the relationship between these three key variables. According to this model, there are three ways of measuring the total level of economic activity in an economy during a period of time:
• By total income
• By total expenditure
• By total output produced
There are three leakages from a country’s economy:
Savings (S), Imports (M), Taxation (T).
There are three injections into a country’s economy:
Investment (I), Government expenditure (G), Exports (X).

Chapter 2. Aggregate demand and aggregate supply
Part I. The components of aggregate demand
AD = C + I + G + (X – M), where:
• C is Consumption
• I is Investment
• G is Government expenditure
• X is Exports
• M is Imports
Part II. Consumption
Consumption is the largest component of aggregate demand.
C = f (Y)
Consumption is a function of income.
Disposable income is income after tax.
Real income is income after inflation.
Discretionary income is income after mortgage.
The ratio of consumption to income is defined by John Keynes as Average Propensity to Consume. Marginal propensity to consume (MPC) is the proportion of additional income devoted to consumption.
The consumption function shows the relationship between consumption and disposable income.
Part III. Investment
Investment is an expenditure undertaken by firms to add to the capital stock. It leads to an increase in the productive capacity of the economy. Investment is dependent on the rate of interest.
Part IV. Government expenditure
Government expenditure is mainly autonomous. There are three types of government expenditure:
• Government consumption
• Government investment
• Transfer payments
Part V. The AD curve
The aggregate demand curve shows the relationship between the level of AD and the overall price level.
Part VI. Aggregate supply
Aggregate supply is the total supply of goods and services produced by a national economy during a specific time period.
Part VII. Trade in goods and services
Trade in goods and services is a competitiveness of domestic goods and services compared with other countries and is also determined by relative rates of inflation and exchange rate.
• Imports are affected by domestic income
• Exports are affected by incomes in other countries
Trade in goods – visible trade.
Trade in services – invisible trade.
Part VIII. The multiplier
The multiplier effect occurs in response to certain types of expenditure. Multiplier can be defined as the ratio of a change in equilibrium real income to the autonomous change that brought it. The formula of the multiplier is 1 over 1 – Marginal Propensity to Consume.

Chapter 3. The Balance of Payments and exchange rate
Part I. The Balance of Payments
The Balance of Payments is a set of accounts which shows the transactions conducted between the residents of a country and the rest of the world.
The current account of the Balance of Payments identifies transactions in goods and services, together with income payments and international transfers, between the residents of a country and the rest of the world. Three main items appear in the current account:
• The balance of trade in goods and services
• Income (major item is made up of profits, dividends and interest receipts arising from UK ownership of overseas assets)
• International transfers (transfers through central government or transfers made or received by private individuals)
The financial account measures transactions in financial assets. These include investment flows and central government transactions in foreign exchange resources. The financial account should be in strong surplus – as it is required to balance the current account deficit.
The capital account contains capital transfers. The largest item of the capital account is associated with migrants.
The overall Balance of Payments must always be zero.
Part II. Exchange rate
Exchange rate is the price of one currency in terms of another.
Real exchange rate – the nominal exchange rate multiplied by the ratio of relative prices, in other words it is a measure of the international competitiveness on an economy’s goods.
Effective exchange rate is the exchange rate for a country relative to weighted average of currencies of its trading partners.

Chapter 4. Macroeconomic policy objectives
Part I. Principal objectives of macroeconomic policy:
• Price stability
• Full employment
• The Balance of Payments
• Economic growth
• Concern for the environment
• Income redistribution
Part II. Price stability
Inflation causes price instability, so one of the main objectives is to decrease inflation.
There are two types of inflation:
• Cost-push inflation (initiated by an increase in the costs of production)
• Demand-pull inflation (initiated by an increase in Aggregate demand)
Persistent inflation happens when the money stock grows more rapidly than real output. Money stock is the quantity of money in the economy.
Part III. Full employment
Full employment occurs when an economy is operation on the production possibility curve with full utilisation of factors of production.
Frictional unemployment is people who are between jobs, they are in job search.
When changes in the pattern of economic activity within an economy take place, structural unemployment occurs.
Sometimes the economy is trapped in an equilibrium position, which is below full unemployment. This situation causes demand-deficient unemployment.
Unemployment may also occur when workers are not satisfied with the current wage rate and prefer not to work. This type of unemployment is called voluntary unemployment. There is also involuntary unemployment, when workers would like to accept the current wage rate, but cannot find employment.

Chapter 5. Economic growth
Part I. Economic growth definition
Economic growth is an increase in the value of output of goods and services in an economy over a period of time and is measured by Gross Domestic Product (GDP).
Part II. Sources of economic growth
Economic growth means an increase in productivity. Productivity measures the efficiency of a factor of production. Labour productivity is measured in two ways: output per worker and output per working hour. Capital productivity is an output per unit of capital.
Total factor productivity is the average productivity of all factors, measured as the total output over the total amount of inputs.
An increase in productivity raises Aggregate supply.

Chapter 6. Macroeconomic policy instruments
Part I. Demand-side policies
Fiscal policy
Fiscal policy is based on the government decisions on its expenditure, borrowing and taxation.
Government budget deficit occurs when tax is less than spending.
Government budget surplus occurs when tax is more than spending.
Monetary policy
Monetary policy is based on the government decisions regarding monetary variables such as money supply and the rate of interest.
In the UK, Monetary Policy Committee (MPC) is responsible for the conduct of monetary policy. MPC sets the rate of interest in order to influence inflation. This interest rate is known as bank rate.
Part II. Supply-side policies
Supply-side policies are a range of measures having a direct impact on aggregate supply and productivity.
Supply-side policies include:
• Education
• Training
• Increasing number of small firms
• Reducing income tax
• Privatisation
• Increasing investment
• Reducing power of trade unions
• Encouraging immigration
• Encouraging inwood investment
• Reducing import controls etc.

Chapter 7. The international economy
Globalisation is a process when the world’s economies are becoming more closely integrated. It is caused by the rapid development in the technology of transport and communications, the reduction of trade barriers and the deregulation of financial markets.
Countries usually specialise in the production of those goods and services, which have a lower opportunity cost of production. In this case countries usually gain from international trade.
However, there are protectionist measures which restrict trade, such as:
• Tariffs
• Quotas
• Non-tariff barriers
Tariff is a tax imposed on imports.