Macroeconomics

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QUESTION 1

Macroeconomics is an analysis of a country’s economic structure and performance and the government’s policies in affecting its economic conditions. Economists are interested to know the factors that contribute towards a country’s economic growth because if the economy progresses, it will provide more job opportunities, goods and services and eventually raise the people’s standard of living. Macroeconomics can progress as it tests a particular theory to see how the overall economy functions, whereby the theory is used to forecast the effects of a particular policy and event that was carried out.

In each economy there are four main macroeconomic objectives: economic growth, full employment, price stability and balance of payments stability. Macroeconomic policy is aimed at achieving these objectives, with one of them usually selected as the main priority.

a) Economic Growth

Economic growth is an increase in the real value of production and income. It is usually measured as the annual rate of increase in real GDP at constant prices . Thus, when economists say that the current growth rate is 3%, they are saying that the real GDP is increasing at an annual rate of 3%. Note that GDP at current prices cannot serve as the basis for calculating economic growth since it increases on account of inflation as well. Only inflation-adjusted figures can be used to calculate economic growth.

In principle, an adjustment for population growth should also be made. For example, if real GDP grows at a rate of 2% per year but the population is also growing at a rate of 2% per year, then on average everyone in the economy is no better off than before. This problem can be overcome by using the ratio between real GDP and the population. This is called real GDP per capita . If real GDP growth exceeds the rate of population growth, real GDP per capita increases, but if real GDP growth is lower than the rate of...