3.2 The national economy in a global context
This section of the specification is primarily about macroeconomics. However, students should understand that microeconomic principles underpin the behaviour of the macroeconomy. Understanding some aspects of macroeconomic behaviour requires that students have a firm grasp of related microeconomic principles, for example, understanding of price elasticity of demand is essential when analysing the extent to which a fall in the exchange rate will lead to an increase in exports.
Students will be required to acquire knowledge and understanding of AD/AS analysis and should be provided with opportunities to use this analysis to explore recent and current economic behaviour. They should understand, and be able to analyse and evaluate, macroeconomic policy.
When applying and evaluating all the macroeconomic models in the specification, such as the circular flow of income and the multiplier process, students should be critically aware of the assumptions upon which these models are based and their limitations when investigating macroeconomic and global issues.
Students should have a good knowledge of developments in the UK economy and government policies over the past fifteen years. They should also be aware that the performance of the United Kingdom economy is influenced by external events in the international economy.
The measurement of macroeconomic performance
The objectives of government economic policy
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Students should be aware that governments may also have other objectives of macroeconomic policy, such as balancing the budget and achieving an equitable distribution of income. They should be aware that the importance attached to the different objectives changes over time. |
Macroeconomic indicators
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Uses of index numbers
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A detailed technical knowledge is not expected of indices such as the Retail Prices Index (RPI) and Consumer Prices Index (CPI), but students should have an awareness of their underlying features, for example, the concept of the ‘average family’ and a ‘basket of goods and services'. |
How the macroeconomy works: the circular flow of income, aggregate demand/aggregate supply analysis, and related concepts
The circular flow of income
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Students are not expected to have a detailed knowledge of the construction of national income accounts. |
Aggregate demand and aggregate supply analysis
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Students should be able to use AD and AS analysis to help them explain macroeconomic problems and issues. For example, they should be able to use AD and AS diagrams to illustrate changes in the price level, demand-deficient (cyclical) unemployment and economic growth. Students should also understand how global economic events can affect the domestic economy. |
The determinants of aggregate demand
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Students will not be required to undertake calculations to illustrate the operation of the accelerator. Students should understand how changes in net exports affect AD and how global events affect economic performance. |
Aggregate demand and the level of economic activity
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Students will not be required to calculate the value of the multiplier using the marginal propensity to consume or the propensities to withdraw. However, they should be able to calculate the value of the multiplier from an initial change in injections and the resulting change in national income. |
Determinants of short-run aggregate supply
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Determinants of long-run aggregate supply
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It is assumed that the long-run AS curve is vertical. |
Economic performance
Economic growth and the economic cycle
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Students should be able to use a production possibility curve and AD/AS diagrams to illustrate the distinction between short-run and long-run economic growth. Students should understand that long-run economic growth occurs when the productive capacity of the economy is increasing and is a term used to refer to the trend rate of growth of real national output in an economy over time. Students should understand that a positive output gap occurs when real GDP is above the productive potential of the economy, and a negative output gap occurs when real GDP is below the economy’s productive potential. |
Employment and unemployment
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Students should appreciate that unemployment has a variety of causes and hence the appropriate policies to reduce unemployment depend on the cause. |
Inflation and deflation
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Students should understand that deflation exists when the price level is falling whereas disinflation is when the rate of inflation is falling. Students should appreciate that deflationary policies are policies to reduce aggregate demand and do not necessarily result in deflation. |
The balance of payments on current account
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Students should be aware that the current account is only one part of the balance of payments but knowledge of the other parts of the account is not expected. |
Possible conflicts between macroeconomic policy objectives
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Students should be able to use macroeconomic models, including the AD/AS model, to analyse the causes of possible conflicts between policy objectives in the short run and long run. |
Macroeconomic policy
Monetary policy
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Students do not need to know how interest rates and the exchange rate are determined but they do need to know how changes in interest rates and the exchange rate affect macroeconomic performance. |
Fiscal policy
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Students should be aware of the main taxes in the UK and the main categories of government spending, eg spending on defence, health, education and welfare. Students should appreciate that governments may deliberately run budget deficits and surpluses to try to influence aggregate demand but they are not required to understand the arguments relating to the pros and cons of balancing the budget or attempting to limit the size of the national debt. |
Supply-side policies
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Students should recognise that supply-side improvements in the economy often originate in the private sector, independently of government, eg through productivity improvements, innovation and investment. |