This section is even far more
important than my previous posting. A lot of the exam questions, especially
macroeconomic essays cannot be well-answered if candidates have poor understanding
of how Chapter 5, 6 and 7 are inter-connected. It is a crucial exam skill but
for the current CAL/ CIE Economics syllabus, I personally find that the
Chapters/ sub-topics aren’t organised in such a way that give candidates the
best understanding of macroeconomics and how all those issues are related. In
that perspective, Edexcel is way better where macroeconomic variables are
introduced one at a time and students are taught to connect them all. While CIE
does teach most of the macroeconomic variables, it seems that they are all over
the place. GDP/ economic growth is in fact the most fundamental macroeconomic concept,
but the weirdest part is that they chose to include it in A2. Most of the time
when we talk about lowering unemployment, fall in inflation and widening of
current account deficit, we cannot isolate economic growth from our discussions
1. Economic growth. Technically, a
country/ nation is said to experience an economic growth if there is an
increase in the real GDP or potential GDP. Both types of growth can be easily
illustrated using the AD/ AS analysis. The former is achieved when the AD curve
shifts rightward and the latter is attained when the AS curve increases. They
are both growth but not quite the same. In layman’s term, real GDP refers to
how much output (quantity) produced in the present whereas potential GDP refers
to how much output a nation as a whole can actually produce if there is an
improvement in both quantity and quality of factors of production. Since no
one, not even economists can actually gauge the true underlying ability of an
economy, therefore the term ‘potential’ is being used. As for out discussion
here, we will mainly relate growth to an increase in real GDP. If you feel more
comfortable, just think of it this way; so long as there an increase in output/
goods and services produced, then economic growth is said to have taken place
in a country. More output implies more foods and beverages served, more new
furniture produced, higher number of clothes, shoes, air conditioners, cars,
mobile phones, papers, tiles, bricks, glasses, concretes, financial products,
haircuts and others all made within the border of a country
2. Unemployment: It is when a person
who is within the working age, willing and able to work but unfortunately fails
to land on a job at the going wage rate. Bear in mind that not everyone who is
within the working age group can be classified as jobless. To be counted as
one, that person must fulfill all the conditions stated earlier. For an
instance, if a person gave job searching and is 30 years old, then he/ she
cannot be counted as one since there is no willingness involved. Equally if
someone who voluntarily quits his/ her day job to enter full time studying,
then that cannot be counted as well
3. Inflation: It is when there is a
sustained increase in the average price level. Bear in mind this, just because
the price of one or two main items have gone up, it cannot be a basis for us to
claim that inflation has taken place. For inflation to exist, there must be an
ongoing/ continuous rise in general prices and also overall price increase must
be greater than overall price decrease. It is also true that the inflation may
not be representative to everyone since our basket of consumption may differ
substantially
Current account deficit. It is when
the overall outflows of money are greater than the inflows for trade in goods,
trade in services, net investment income and net transfers. Usually, the case
of current account deficit is due to the poor overall performance for both
trade in goods and trade in services. For most of the economies, these two
components under the current account are the largest determinant
Now, upon understanding of the
basics, we shall step into the next section which is understanding how these
four components eventually affect one another. Please do not attempt to
rot-learn/ rote-memorise. Use as much logic as possible. That is what I call as
‘sustainable learning’:
1. Economic growth vs. inflation: When
there is growth, it is normally followed by a period of rising income. Well
how? As mentioned earlier, more output will be produced and to produce that
much output, factors of production have to be paid. With more income,
consumption into the economy will increase and this can be represented by a
rightward shift of AD curve. Demand-pull inflation takes place
2. Economic growth vs. current account
deficit. Again, when income rises, people will have more money to spend into
the economy. However, it is worth noting that not everything that they spent on
is manufactured locally. Some of them are imported goods and services e.g.
purchase of imported cars and travelling abroad. This means more money flowing
out of the country and hence the case of current account deficit
3. Economic growth and unemployment.
When income rises, people will have money to spend into the economy. They will
go shopping, travelling domestically, watching movies, fine dining and others.
This means businesses will have to employ more people to cater/ accommodate for
the rise in customer sales and so unemployment will fall
4. Unemployment vs. inflation. There is
an interesting relationship between these two. They are naturally, inversely
related. As unemployment rises, inflation will fall and if unemployment falls,
inflation will rise. Why is that so? When more people are unemployed, the
spending power into the economy will fall. This means a fall in AD curve and so
less demand-pull inflation. Likewise, when unemployment rises, it will put a
downward pressure on wages. This means a fall in cost-push inflation as well.
On contrast, when unemployment is low, there will be greater spending into the
economy allowing demand-pull inflation to take hold. Equally, if unemployment
is low, skilled manpower can be scarce and in other to retain or attract the
best talents to work for them, wages have to be increased. This is the basis
for cost-push inflation
5. Unemployment vs. current account
deficit. When many people are jobless, that implies weaker overall spending
into the economy which may lead to lower consumption of imported goods and
services. As less money is outflowing from the country, then size of current
account deficit will shrink
6. Inflation vs. current account
deficit. When the country experiences relatively higher inflation than its commercial
partners, then its goods and services produced are likely to become less price
competitive. This implies lesser exports as trading partners would probably
substitute towards other countries that are more price competitive. Therefore,
current account deficit worsens
Part 2 will come very soon
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