Chapter3 The macro-economic environment ACCA F1 Chapter3 The macro-economic environment

Introduction of macroeconomics It is the study of the entire economy in terms of the total amount of goods and services produced, total income earned, the level of employment of productive resources, the general behavior of prices, etc. It is an important part of economics. It concerns the macro economy, which is one type of the general environment around an organization.

National income Gross national product(GNP) and gross domestic product(GDP). GNP:国民原则 GDP:国土原则 The sectors of national income include: consumption, savings, investment, taxation, government spending, import and export. Consumption, export and investment are very critical to push the economic growth.

National income Households Firms Financial Government sector Foreign sector

Aggregate demand&supply When aggregate demand equals to aggregate supply, we get a price and an output. When all the resources are full-employed, the increase of demand will cause the increase of price (inflationary gap). In the opposite situation, the increase of demand will cause the increase of output (deflationary gap).

Inflation Inflation is an increase in price levels generally, and the purchasing power of money declines. A healthy economy needs some inflation, but high inflation is harmful. High rate of inflation may redistribute income and wealth, influence export and import, make the value of money uncertain, change resource costs, and then reduce the economic growth.

Inflation There’re many causes of inflation. How to measure inflation? Excess aggregate demand Increasing cost Social expectation Money supply growth How to measure inflation? Retail Price Index(RPI)- including house Consumer Price Index(CPI)-excluding house Producer Price Index(PPI)

Unemployment When a person don’t have a job if he have the ability to work, we say he is unemployed. Unemployment is a waste of resource, and may cause many social problems Types of unemployment Real wage unemployment- short/long term Frictional/seasonal unemployment- short term Structural/technological/cyclical unemployment- long term

Economic growth It is the increasing of real gross national product per capita(人均实际GNP), regardless of inflation. The growth of aggregate demand and aggregate supply determine actual economic growth. The potential of an economy is based on the amount and productivity of resources. Consuming, export and investment is very important to Chinese economic growth.

The balance of payments International trade: export and import Export>import: trade surplus（贸易顺差） Export<import: trade deficit（贸易逆差） People prefer equilibrium International finance Current account（经常账户） Capital and financial account（资本和金融账户）

Balance of export & import The government’s goal Balance of export & import Full employment Control inflation

Policy to realize the goals

Fiscal policy Fiscal policy is the government policy on taxation, public borrowing and public spending. It is a method to manage aggregate demand. When the economy is in a downturn, government can reduce the level of taxation or spend more.(罗斯福新政，我国的4万亿) When the economy is booming, government can heighten the level of taxation or spend less.

Monetary policy Monetary policy uses money supply, interest rates or credit controls. It is used to influence aggregate demand, too. Money supply has effect on prices and incomes, and in turn influences demand. Interest rate reflect the price of borrowing, which influences firm’s financing cost. An decreasing of interest rate may stimulate investment and consumption, and reduce savings.

Monetary policy Credit controls can influence the financing cost of firms, too. (存款准备金制度) Exchange rate has direct effect on the price of trading goods, then it can influence export and import. Both monetary policy and fiscal policy are important to get the macroeconomic objectives.