Study Note - What is Macroeconomics?

Macroeconomics considers the economy as a whole – i.e. the volume of goods and services produced by all businesses and the government (state) sector. Macroeconomics also studies relationships and connections between one country and another for example, how a recession in the United States affects businesses in the UK. Or how a change in tariffs introduced by the Chinese affects British firm trying to export to the Far-East. The scope of macroeconomics includes looking at the success or failure of government policies.

Introducing the UK economy...

• The UK has the second largest economy in the European Union behind Germany
• The UK is the 6th largest world economy and is a member of the G7, a group which brings together the Finance Ministers of the seven largest developed economies in the world – UK, US, Japan, Italy, Germany, France and Canada - to discuss economic policy
• In 2009 the UK contributed 3 per cent to global output and 4% of global trade in goods and services.
• In terms of per capita income, the UK is ranked in the top fifteen nations and it also has one of the highest levels of human development as measured by the United Nations index.
• Britain enjoyed economic growth from 1992 through to 2008 but in 2009 the economy suffered a recession. Real GDP fell by five per cent in 2009 and started a weak recovery during 2010-011
• Over a quarter of the UK’s GDP comes from selling goods and services overseas (exports).The value of imports exceed exports and this means that the UK runs a trade deficit with other countries.
• The UK is part of the European Union (EU) and is a founder member of the World Trade Organisation (WTO) which it joined in 1995. The UK retains its own currency (sterling) having decided not to join the single currency area (or Euro Zone).

This chart shows an index of the value of production from manufacturing and service sectors in the UK. The base value for the index is 2005 = 100

In macroeconomics we look at things ‘in the whole’ and, in doing so, we use these terms:

• Households: receive income through wages and salaries from their jobs and from their investments and then buy the output of firms (this is known as consumer spending and is labelled as C)
• Firms: Businesses hire land, labour and capital inputs when making products for which they pay wages and rent (income). Firms receive payment from consumers and profitable businesses may invest (I) a percentage of profits in new producer goods such as equipment and technology.
• Government: collect taxes (T) to fund spending on public services such as education, healthcare and defence. Government spending is given the label (G).
• International sector: The UK buys imports from other countries, (M) and overseas businesses and consumers buy UK products – known as exports (X). International trade is important for the UK. Millions of jobs depend directly or indirectly on the UK remaining competitive in overseas markets.

How do we measure the economic performance of developed and developing countries?

Macroeconomic performance refers to how well a country is doing in reaching a number of objectives or targets of government policy.

The main aim is an improvement in the real standard of living for the majority of the population.

The term ‘real’ means that we have taken into account the effects of rising prices so that we get a better picture of how many products we can afford to buy and consume.

The main aims are macroeconomic policies are to improve outcomes in these indicators:

• Jobs – how high is unemployment? Is the economy creating enough new jobs for people entering the labour market each year?
• Prices –are price rises under control? Can the economy avoid a period of price deflation? Price stability refers to low, stable, positive inflation of between 1-3% per year.
• Trade – is the economy performing well in trading goods and services with other countries? How competitive are British businesses in the global economy?
• Growth – how successful has the country been in achieving growth and in laying foundations for future expansion?
• Efficiency - is the economy improving productivity so that more goods and services can be supplied at lower cost? Are we cutting the amount of energy we use per unit of output?
• Public services – have the benefits of growth flowed through into better provision of state services such as education, law and order, the National Health Service and transport?
• The environment – many economists now focus on whether an expanding economy is sustainable in terms of its environmental impact.
• Inequality of income and wealth - leaving aside changes in average living standards, has the economy made progress in achieving an acceptable distribution of income and wealth? Or has the gap between lower and higher-income families become wider leading to higher relative poverty?

Macroeconomic performance therefore covers a wide range of indicators – summarised as:

• Economic growth (short term and long term)
• Jobs (unemployment and employment)
• Prices
• Trade
• Productivity
• Average standard of living
• The distribution of income and wealth
• Quality of public services

The macroeconomic performance of any one nation is affected by events, policies and shocks in other countries. No economy is immune to what is happening in the global financial and economic system.