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MACROECONOMIC OBJECTIVES AND THE ECONOMIC CYCLE
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“Macroeconomics is concerned with issues, objectives and policies that affect the whole economy “
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measured using the ‘claimant count’, where those counted must be out of
work, able to work and looking for work whilst actually claiming state benefits
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This includes
the young unemployed who aren’t always eligible to claim and others who don’t claim for many reasons,
making the ILO measure a more realistic measure than the claimant count
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Some of the inactive members choose to be out of
work, for instance, students and those who retire early
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For prices to be stable the inflation rate should be zero
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The UK
government prefers the target the “underlying rate of inflation” (annual percentage change in the RPI but
housing costs are removed in the form of mortgage interest payments)
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5%
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• Inflation risk premiums in financial markets go down, which means that real interest rates fall
as well
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• Businesses and economic agents don’t have to hedge against inflation and can
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• Lower inflation can help reduce social distortions
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Economic growth:
Growth tends to be measured in terms of the rate of change of real GDP – inflationary effects are
removed to allow for international comparisons
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Growth is good as it provides the following:
• Higher living standards – i
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Real GNI per capita – helps reduce relative poverty and improve
development outcomes (HDI)
• Employment effects – sustained growth stimulates jobs and contributes to lower
unemployment rates which helps reduce income inequality
• Fiscal dividend – higher growth will raise tax revenues and reduce government spending on
unemployment and poverty related welfare benefits
• Accelerator effect – rising growth stimulates new investment, e
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in green technologies
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It is split
into the ‘Current Account’ and the ‘Capital & Financial Accounts’
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In terms of imports and exports of goods and services
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Having a balance of payments in surplus leads to:
• Increased employment in the export sector
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EXPLAIN WHAT IS MEANT BY THE ‘ECONOMIC CYLE’ (ALSO KNOWN AS THE ‘BUSINESS CYLCE’
OR THE ‘TRADE CYCLE’)
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Essentially, the cycle depicts the fluctuations in real GDP over time against the long run trend rate of real
GDP
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In response, Central Banks
tend to increase interest rates to reduce growth and inflation
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A lull in
technological innovation may cause slower growth
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This is when
politicians try to have a boom (high growth) before an election to help them win
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- Global trade cycle- a global economic downturn will tend to affect individual economies
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Boom:
Individuals
➢ More jobs created and higher real wages, which leads to a growth in consumption
➢ Higher living standards will reduce extreme poverty
➢ Sustained growth stimulates jobs and reduces unemployment
➢ Incomes are more unevenly distributed, which can have social implications
Firms:
- Accelerator effect – rising growth stimulates new investment; better growth may attract FDI projects
- Increase in demand for capital goods as firms invest in extra capacity to meet strong demand
Government:
➢ Higher economic growth will raise tax revenues and reduce government spending on unemployment
and welfare benefits
➢ Higher spending on handling the negative externalities of pollution and waste
➢ Inflationary pressures if the economy ‘overheats’ and has a positive output gap
➢ High demand for imports which may cause the economy to run a larger trade deficit as it cannot
supply all of the goods/services that consumers want
Peak:
Very much the peak economic boom, where implications of the boom are exaggerated to the point that the
economy may start to experience a fall in the rate of growth – an economic ‘slowdown’
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Individuals:
- Higher inflation and interest rates may cause a decline in aggregate demand as the cost of borrowing
rises and saving becomes more desirable
Firms:
- High inflation may cause FDI to fall as it is a sign of an unstable economy and will deter investors
- High inflation will reduce the profitability of a firm as higher prices can lead to increased costs and
lower profits

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Less consumer spending due to high interest rates will reduce the sales a firm makes, and appropriate
changes must be made, i
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lower prices
Government:
- Central banks may decide to raise interest rates in order to control inflation
Recession:
In simple terms, a recession is a fall in real GDP for two consecutive quarters
Individuals:
- Higher unemployment will increase extreme poverty
- Contraction in consumer spending as individuals prefer to save instead
Firms:
- Fall in demand for capital equipment
- Decline in investor confidence
- Rise in the number of business failures and businesses announcing lower profits and investment
- Large price discounts offered by businesses in a bid to sell their excess stock
Government:
- Drop in the value of exports and imports of goods/services
- Tax revenues fall, and welfare benefit spending rises
- Budget deficit rises quickly
Recovery:
The state of business confidence is a key determinant in this stage

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