Causes of current account deficits _ Cambridge IGCSE™ Economics FE2020

Macroeconomics Cheat Sheet

Key Definitions

• GDP (Gross Domestic Product): Total value of goods and services produced in an economy.

• GNI (Gross National Income): GDP + net income from abroad.

• Real GDP: Adjusted for inflation.

• Nominal GDP: Not adjusted for inflation.

• Economic Growth: Increase in real GDP over time.

• Unemployment Rate: (Unemployed / Labor Force) × 100

• Inflation Rate: (CPI new - CPI old) / CPI old × 100

• Fiscal Policy: Use of government spending and taxation to influence the economy.

• Monetary Policy: Use of interest rates and money supply to influence the economy.

• Supply-Side Policy: Policies aimed at increasing productive capacity.

• Lorenz Curve: Graph showing income inequality.

• Gini Coefficient: A measure of income inequality (0 = perfect equality, 1 = perfect inequality).

Key Diagrams

1. Circular Flow of Income - Shows how money moves between households and firms.

2. AD/AS Model - Illustrates macroeconomic equilibrium and effects of policy.

3. Phillips Curve - Shows the tradeoff between inflation and unemployment.

4. Lorenz Curve - Shows income distribution and inequality.

5. Foreign Exchange Market - Depicts currency demand and supply.

Macroeconomic Aims of Government

1. Economic Growth – Increase in real GDP.

2. Low Unemployment – More people in jobs.

3. Stable Inflation – Avoiding hyperinflation/deflation.

4. Balance of Payments Stability – Avoiding excessive trade deficits/surpluses.

5. Income Equality – Reducing the gap between rich and poor.

6. Environmental Sustainability – Growth without excessive harm.

Macroeconomic Policies

Fiscal Policy (Government Spending & Taxation)

• Expansionary (↑ G, ↓ Taxes) – Boosts AD, used in recession.

• Contractionary (↓ G, ↑ Taxes) – Reduces AD, used to control inflation.

Monetary Policy (Interest Rates & Money Supply)

• Expansionary (↓ Interest Rates, ↑ Money Supply) – Boosts investment & consumption.

• Contractionary (↑ Interest Rates, ↓ Money Supply) – Reduces inflation.

Supply-Side Policies (Boost Long-term Growth)

• Education & Training

• Reducing Business Regulations

• Infrastructure Development

• Lowering Taxes on Businesses

Key Macroeconomic Relationships

• Higher Inflation → Lower Unemployment (Short Run Phillips Curve)

• Higher Interest Rates → Lower Investment & Consumption

• Higher Taxes → Lower Disposable Income → Lower Consumption

• Trade Deficit → Currency Depreciation → Exports Become Cheaper

International Trade & Exchange Rates

• Floating Exchange Rate: Determined by supply & demand.

• Fixed Exchange Rate: Set by the government.

• Appreciation: Currency increases in value (↓ Exports, ↑ Imports).

• Depreciation: Currency decreases in value (↑ Exports, ↓ Imports).

Unemployment Types & Solutions

1. Frictional – Between jobs (Solution: Better job-matching programs).

2. Structural – Job mismatch (Solution: Retraining, education).

3. Cyclical – Due to recession (Solution: Expansionary fiscal & monetary policy).

4. Seasonal – Jobs dependent on seasons (Solution: Job diversification).

Inflation Causes & Solutions

• Demand-Pull Inflation: AD increases too fast (Solution: Contractionary Policy).

• Cost-Push Inflation: Higher production costs (Solution: Supply-Side Policies).

Inequality & Poverty

• Causes: Unemployment, lack of education, discrimination.

• Solutions: Progressive taxation, social welfare, education funding.

This should help you with quick recall before the exam! Let me know if you want anything added.