IB SL Macroeconomics

Mainly AO1 and AO2 (no diagrams or RWEs)

National income accounting

A systematic approach to measuring a country’s economic activity by aggregating the value of goods and services produced, incomes earned, and expenditures made.

The output method (O)

Measures the value of all finished goods and services in a country in a year.

The income method (Y)

Measures the value of all incomes in a country in a year.

The expenditure method (E)

Measures the value of all spending in a country in a year.

GDP = C+I+G+(X-M)

Measures the value of all spending in a country in a year. It is the sum of: household consumption (C) + capital investment (I) + government spending (G) + net exports (exports – imports (X-M)).

GDP

The total value of goods and services produced within an economy in a given time period.

Nominal GDP

Measures GDP using current prices of all goods and services – inflation is not considered, so this rises even if output stays constant.

Real GDP

Measures all final output of goods and services in a given economy in a given year, but uses constant prices, which adjust for inflation.

rGDP/capita

A country’s GDP divided by the number of people in that country – this is useful to see how productive an average person is in that economy.

rGDP/capita at purchasing power parity (PPP)

Refers to adjusting for how many goods and services the GDP will actually get you around the world/across currencies.

GNI

GDP plus a net factor income from abroad – it includes money paid by your citizens abroad, but minus money earned by foreign workers in your country.

Standardised comparisons GDP and GNI

GDP measures output within borders, enabling cross-country comparisons. GNI adjusts for international income flows.

OECD Better Life Index

Based on material living conditions such as housing and income, and qualities of life such as health, satisfaction and safety.

Happiness Index

Measures how happy a sample of people is in every country by asking people how happy they are with factors like emotional wellbeing, health, work and economy.

Happy planet index

Measures human wellbeing but also considers ecological footprints which means that countries with low footprints tend to come out on top.

Business cycle

A model that describes short-term fluctuations of economic activity of a country, as well as the long-term general trend, over time.

Peak

When economic activity is at the highest level. Unemployment is low and confidence in the economy is high.

Recession

The stage at which real GDP decreases. Businesses fail, unemployment rises and confidence is low.

Slump

Where real GDP is at its lowest. Unemployment is high and many businesses have closed down.

Recovery

When real GDP starts to rise again. Consumption, investment and net exports start to rise again, increasing confidence and employment.

Boom

Real GDP rises. Components of aggregate demand rise. Price levels rise.

Aggregate demand (AD)

The total amount of demand for all goods and services in the economy, or the value of all goods and services in the economy, in a specified time period.

Aggregate supply (AS)

The total amount of goods and services that firms are willing and able to provide in the economy, in a specified time period.

Short-run aggregate supply (SRAS)

Shows the planned output at different price levels. Wage and state of technology are assumed constant, and higher prices mean higher levels of supply.

Long-run aggregate supply (LRAS)

The maximum level of rGDP that the economy is currently hypothetically able to achieve, with full employment in all sectors.

Inflationary gaps

Occur when the economy has higher output than its potential (employment is beyond full).

Deflationary gaps

Occur when the economy has lower output than its potential (there is unemployment of at least one factor of production).

Neoclassical equilibrium

Occurs when the economy is operating at full employment. All lines intersect.

Keynesian equilibrium

Equilibrium can be at any point along AS, it will not adjust itself automatically to a specific location.

Animal spirits

If a market is bullish, then consumers and businesses are will of confidence, so they borrow losts of money and create economic bubbles. If a market is bearish then people are very pessimistic and do not consume even when prices are falling - they hibernate.

Sticky wages

Wages are downward sticky, leading to a phenomena known as excess unemployment as firms can’t cut wages to cut costs, so they fire people instead.

Rational decision making

Consumers and firms act rationally to maximise utility or profits, using all available information

Market equilibrium

Supply and demand interactions naturally lead to efficient resource allocation without government intervention

Consumer sovereignty

Prices reflect perceived value (utility) rather than production costs

Sticky wages/prices

Prices and wages adjust slowly, causing prolonged unemployment or inflation

Demand-driven economy

Aggregate demand determines output and employment

Underemployment equilibrium

Economies can stabilise below full employment without intervention

Economic growth

A sustained increase in a country’s real GDP over time.

Employment

The use of all factors of production in the process of producing goods and services. Unemployment of labour is usually the biggest concern as a macroeconomic objective.

Unemployment

The situation in which people are willing and able to work, looking for work, but are unable to find any.

Labour force

The amount of people employed, self-employed, and unemployed in an economy.

The natural rate of unemployment

The equilibrium of unemployment. There will always be structural, seasonal and frictional unemployment in an economy.

Cyclical unemployment

Demand deficient unemployment, caused by a downturn in the business cycle (when aggregate demand falls)

Structural unemployment

Mismatch between workers’ skills and job requirements due to economic shifts.

Frictional unemployment

Short term unemployment from voluntary job transitions or workforce entry.

Seasonal unemployment

Joblessness tied to predictable seasonal demand fluctuations.

Inflation

The sustained rise in the general price level in an economy over time.

Price stability

The general price level remains constant because of low and stable inflation.

Demand-pull inflation

Inflation caused by higher demand for goods and services in the economy, which grows faster than supply.

Cost-push inflation

Inflation caused by higher costs of production (supply side shock), shifting SRAS to the left.

Disinflation

A slowdown in the rate of inflation

Deflation

A sustained decrease in the general price level of goods and services

Recession

Two consecutive quarters of declining GDP

Depression

A severe and prolonged economic downturn that lasts several years and involves significant declines in GDP

Benign deflation

Occurs when AS shifts to the right, this is good because prices go down and real GDP increases – it is associated with growth and often driven by rising productivity caused by automation.

Malign deflation

Is demand side inflation – it is when AD decreases, which causes lower growth and a deflationary spiral.

Equity

Economic fairness.

Equality

Everyone earns the same amount.

Lorenz curve

Represents the inequality of income in a country by showing how much income certain percentages of the population have.

Gini coefficient

A value that measures income or wealth inequality – ranging from 0 (perfect equality) to 1 (full inequality).

Poverty

The state of an individual, household or country being extremely poor and unable to meet basic needs.

Absolute poverty

When people are unable to access basic human needs such as food and shelter.

Relative poverty

When people are unable to reach a specified level of income, typically 50% of their countries’ average earnings.

International poverty lines

A minimum threshold of income people must earn to have access to basic human needs.

Minimum income standards

A minimum income needed for what members of the public think is an acceptable living standard.

Multidimensional poverty index

An index that tracks many components of poverty, such as health, education and standards of living. It therefore offers a more thorough indication of poverty.

Direct taxes

Taxes imposed on income rather than expenditure

Indirect taxes

Taxes levied on goods and services.

Monetary policy

The government’s use of interest rates and the money supply to influence the level of aggregate demand and economic activity.

Inflation targeting

Setting a specific inflation rate as a goal – helps to manage expectations and enhance the central bank’s credibility.

Nominal interest rate

The actual interest rate of a loan, regardless of inflation

Real interest rate

The interest rate of a loan adjusted to the inflation rate.

Expansionary monetary policy

Central bank policy during economic downturn or recessions to stimulate growth by increasing the money supply and lowering borrowing costs.

Contractionary monetary policy

Central bank policy to curb excessive inflation or cool an overheating economy.

Fiscal policy

The use of taxation and government expenditure to influence the level of economic activity in order to achieve macroeconomic objectives.

Expansionary fiscal policy

The use of increased government spending and/or reduced taxes to stimulate economic activity and achieve macroeconomic objectives – usually used when trying to close recessionary gaps.

Contractionary fiscal policy

The use of decreased government spending and/or increased taxes to reduce the level of economic activity and achieve macroeconomic objectives – this is used when the government wants to close inflationary gaps.

Interventionist supply-side policies

Government measures aimed at increasing the productive capacity of the economy by directly addressing market failures and investing in key areas.