Economics HL - Macroeconomic Indicators

Updated February 8, 2025

Macroeconomics

the allocation of a nation's resources: the whole economy

• including economic growth; employment; inflation or price stability; international stability; income distribution; leakage and injections

Leakage

DIVERSION OF INCOME (savings, taxes, imports)

• any diversion of income from the domestic spending stream; including savings, taxes, and imports

• capital or income that escapes an economy or system

ex: bank deposits; imports

Injection

INTRODUCTION OF INCOME (investment, expenditure, export)

• introductions of income into circular flow from sources outside households and businesses, such as additions to investment, government expenditure and exports

• the addition of spending into the economy that stimulates growth; includes investments, government spending, and exports.

Circular Flow of Income

• the unending flow of production of goods and services, income, and expenditure in an economy

Circular Flow of Income: Categories

Main: Households 🏡 ↔ Firms 💼

Sub-categories:

• Goods & Services

• Factors of Production (land, labor, capital, entrepreneurship)

• Banks

• Government

• Abroad

Circular Flow of Income: Injections & Leakage

Injections (external economic activities that introduce money into the economy):

• revenue

• bank investment

• gov expenditure

• exports from the country to abroad

Leakages (withdrawal of income):

• salaries and wages

• goods and services

• personal savings

• gov tax

• expenditures abroad or imports

National Income Figures: Main Indicators

• GDP

• Nominal GDP (raw; distorted by inflation)

• Real GDP (adjusted for inflation)

• GDP per capita (divide GDP of a nation by population)

• GNP (total value of all goods and services)

• Economic growth

National Income Figures (positive & negative)

Positives ✔

+ easy to compare (past and with other countries)

+ helps identify overall trends and outliers

+ helps government recognize goals and create better policies

+ gives an idea of the size of the economy

+ GNI & GDP per capita shows the average lifestyles of individuals

Negatives ⚠

- doesn't show inequalities (wealth disparity)

- difficulty of calculating (inaccuracy)

- inflation changes

- opportunity cost: GDP development uses up finite natural resources

- unrecorded economic activity (self-sufficient DIY & black markets)

- devastation of nature for development limits growth

- too holistic

- growth is not conclusive—economic growth doesn't directly relate to indicators

GDP: Definition

Gross Domestic Product: the total income earned within a country (residents and foreigners)

Expenditure Formula: C + I + G + (X - M)

Consumption + Investment + Gov spending + (Export - Import expenditure)

GDP Equation

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

Consumption + Investment + Gov spending + (Export - Import)

GDP Case Study: China's Ghost Cities

↑ GDP doesn't always equal ↑ Quality of Life

• massive-scale cities: rapid construction drives GDP up

• however, residents are unable to afford the houses

• OVERSTATING ECONOMIC GROWTH: appears to advance

National Income Calculation: 3 Methods

1. Income method

(rent, wages, interest, profit)

2. GDP: Expenditure method

C + I + G + (X - M)

= Consumption + Investment + Gov spending + (Export - Import expenditure)

3. Output method

total value of goods + services

GDP Increase + Effects

as GDP increases...

+ Good: ↑ spending; ↑ producing; ↑ employment

- Bad: ↑ pollution; market failure; ↑ possible exploitation

Real GDP

GDP adjusted for inflation

• dividing "nominal GDP" by "GDP deflator" then "times 100"

• GDP deflator is "nominal GDP" divided by "real GDP" "times 100"

GNI

• Gross National Income: the total income earned by residents + residents abroad, all income earned by a nation's people

GDP + net income of residents abroad = GNI

PPP (Purchasing Power Parity)

• estimates the buying power of income across different countries by using prices in the United States as a benchmark

• exchange rate for residents to purchase a basket of goods or services in different countries

• takes into account the cost of living

(Local Price) ÷ (US Price)

* Big Mac Index 🍔 cost of buying a Big Mac in different countries

Happy Planet Index (HPI)

[(Life Expectancy) x (Experienced Well-Being)] ÷ (Ecological Footprint)

• higher number = happier life

• well-being is surveyed

• ranks countries by the SUSTAINABILITY of the country's well-being

Happy Planet Index: Benefits & Limitations

Benefits ✔

• Sustainability-Focused 🌍 (ecological footprint)

• Measures Well-Being Beyond Wealth 😊 (life satisfaction and life expectancy, more holistic than economic growth)

• Encourages Policy Change 📊 (gov prioritize happiness and sustainability over pure economic growth)

• Challenges the Traditional "Richer = Happier" Mindset 💰🚫

• Global Perspective 🌎

Limitations ⚠

• Ignores Political and Human Rights Factors 🏛 (political instability or inequality)

• Overemphasizes Environmental Impact 🌱 (high consumption lowers score)

• Subjectivity in Well-Being Measurement (subjective and influenced by culture)

• Does Not Account for Economic Growth and Innovation 📈 (high innovation and economic progress = high resource consumption = lower score)

• Limited Global Recognition 🌐 (less widely used)

World Happiness Index

based on RESPONDENT RATINGS of their own lives

• Social support • GDP per capita • Healthy life expectancy • Freedom of making life choices • Generosity • Perceptions of corruption (gov & business)

World Happiness Index: Benefits & Limitations

Benefits ✔

• holistic measure of well-being (economic, social, psychological)

• global comparisons of quality of life

• guides government policies

• public awareness and engagement

• broader definition of success beyond economics

Limitations ⚠

• subjectivity of happiness (1-10 ranking of life)

• cultural bias

• limited economic representation (economic inequality can distort ranking)

• short-term fluctuations (happiness levels can change due to temporary events that may not reflect long-term well-being

• six key factors may not fully capture happiness of all societies

OECD Better Life Index

• first attempt to bring together internationally comparable measures of well-being

• in line with recommendations of the Stiglitz-Sen-Fitoussi Commission

OECD Better Life Index: Main Topics

1. Housing 🏡

2. Income 💴

3. Jobs 💼

4. Health 🚑

5. Education 📚

6. Work-Life Balance ⚖

7. Civic Engagement 🏛

8. Environment 🌿

9. Social Connections 🏘

10. Safety 🔒

11. Life Satisfaction 😀

OECD Better Life Index: Topics in Depth

🏡 1. Housing

• Affordability 💰

• Basic facilities 🚰

• Living space 🏠

💴 2. Income

• Household net income 📊

• Household net wealth 💵

💼 3. Jobs

• Employment rate 👩‍💻

• Job security 🔒

• Earnings 💲

🚑 4. Health

• Life expectancy ⏳

• Self-reported health 😊

📚 5. Education

• Years of schooling 🎓

• Student skills 📖

• Educational attainment 🏫

⚖ 6. Work-Life Balance

• Time spent on leisure and personal care 🎭

• Long working hours ⏰

🏛 7. Civic Engagement

• Voter turnout 🗳

• Trust in government

🌿 8. Environment

• Air and water quality 🌱

• Access to green spaces 🌳

🏘 9. Social Connections

• Community support

• Strength of social networks 👥

🔒 10. Safety

• Crime rates 🚔

• Feelings of safety at night 🌙

😀 11. Life Satisfaction

• General happiness and well-being 🎉

Business Cycle

Alternating periods of economic expansion and economic recession: a cycle of fluctuations in the Gross Domestic Product (GDP) around its long-term natural growth rate

• long term growth trend

• potential output

• general economic growth over time

Business Cycle: Main Parts

peak (boom, bubble); recession (slump); recovery; peak; growth trend

• peak: surge in sales, stabilizes for a short time until recession

• recession = at least 2 quarters of negative growth

• depression = prolonged recession lasting several years

• recovery = when GDP starts to rise from trough, leading to economic growth

• growth trend = line of best fit, the general direction in which the economy is moving

Business Cycle: Peak

the point at which the economy turns from expansion to recession

• peak: surge in sales, stabilizes for a short time until recession

Business Cycle: Recession & Depression

• recession = at least 2 quarters of negative growth

• depression = prolonged recession lasting several years

Business Cycle: Recovery

Rising income/employment/production

• recovery = when GDP starts to rise from trough, leading to economic growth

Business Cycle: Growth Trend

• growth trend = line of best fit, the general direction in which the economy is moving

Business Cycle: Bull & Bear Market 🐂📈🐻📉

"Don't mess with the bull or you'll get the bear"

🐂 Bull Market: expansion and strong economic growth

🐻 Bear Market: recession and weak economic growth

Business Cycle: Bull Market 🐂📈

🐂📈 Bull Market (Expansion Phase)

• A period of rising stock prices (usually by 20% or more)

• Strong economic growth, high investor confidence, and increasing corporate profits

• Low unemployment, rising wages, and high consumer spending

• Often fueled by low interest rates and strong demand for goods/services

• Stock Prices 📊 Rising

• Economic Growth 🌍 Strong

• Investor Confidence 💡 High (optimism)

• Employment 💼 High

• Interest Rates 💰 Often Low

Business Cycle: Bear Market 🐻📉

🐻📉 Bear Market (Contraction/Recession Phase)

• A period of declining stock prices (drop of 20% or more)

• Weak economic growth or recession, with falling corporate profits

• Higher unemployment, reduced consumer spending, and business slowdowns

• Often triggered by high inflation, rising interest rates, or economic crises

• Stock Prices 📊 Falling

• Economic Growth 🌍 Weak/Recession

• Investor Confidence 💡 Low (fear)

• Employment 💼 Low (job losses)

• Interest Rates 💰 Often Rising

Business Cycle: Output Gap Problems

Output gap = when actual output exceeds or falls under the long-term growth trend (the space between the trough or the peak to the growth trend)

• above (peak) or below (trough) of growth trend

Business Cycle: Output Gap Problems (positive)

• Peak to growth trend

↑ employment ↑ wages ↑ business confidence

↑ spending ↑ production

Positive output gap problems

• producing beyond capacity

• inflation from increased spending on finite resources

Business Cycle: Output Gaps Problems (negative)

• Trough to growth trend

↓ employment ↓ wages ↓ business confidence

↓ spending ↓ production

Negative output gap problems

• unemployment

• decreased spending from job loss or in case of

• economic recession