Section 3: Macroeconomics

The purpose of this unit is to provide students with the opportunity for a detailed examination of the major macroeconomic issues facing countries’ economic growth, economic development, unemployment, inflation and income distribution.

The economic strategies available to governments – demand side policies, supply-side policies, direct intervention – are introduced and evaluated. These policies are applicable to almost all areas of macroeconomics, international economics and development economics.

3.1 Measuring national income

• Circular flow of income
• Methods of measurement – income, expenditure and output
• Distinction between
  • gross and net
  • national and domestic
  • nominal and real
  • total and per capita

3.2 Introduction to development

• Definitions of economic growth and economic development
• Differences in the definitions of the two concepts
• Gross Domestic Product (GDP) vs. Gross National Product (GNP) as measures of growth
• Limitations of using GDP as a measure to compare welfare between countries
• Allowance for differences in purchasing power when comparing welfare between countries
• Alternative methods of measurement
• Problems of measuring development

3.3 Macroeconomic models

• Aggregate demand – components
• Aggregate supply
  • short-run
  • long-run (Keynesian vs. neo-classical approach)
• Full employment level of national income
• Equilibrium level of national income
• Inflationary gap
• Deflationary gap
• Diagram illustrating trade/business cycle

3.4 Demand-side and supply-side policies

• Shifts in the AD curve / demand-side policies
  • fiscal policy
  • interest rates as a tool of monetary policy
• Shifts in the AS curve / supply-side policies
• Strengths and weaknesses of these policies

3.5 Unemployment and inflation

Unemployment

• Full employment and underemployment
• Unemployment rate
• Costs of unemployment
• Types of unemployment
  • structural
  • frictional
  • seasonal
  • cyclical/demand-deficient
  • real wage
• Measures to deal with unemployment

Inflation

• Definitions of inflation and deflation
• Costs of inflation and deflation
• Causes of inflation
  • cost push
  • demand pull
  • excess monetary growth

3.6 Distribution of income

• Direct taxation
• Indirect taxation
• Progressive taxation
• Proportional taxation
• Regressive taxation
• Transfer payments