1.

Explain 4 variables of macroeconomics

There are 4 main macroeconomic variables that policymakers should try and manage: Balance of
Payments, Inflation, Economic Growth and Unemployment.
This can be easily remembered using the following acronym:
B: Balance of Payments
I: Inflation
G: (Economic) Growth
E: Employment

The Balance of Payments is the difference between the total amount of goods a country exports (sells to
other countries) and the total amount of goods a country imports (buys from other countries). This can
be simplified to X-M.
If the amount of goods that a country exports (X) is greater than the amount of goods that a country
imports (M), there is a balance of payments surplus because X>M.
If the amount of goods that a country exports (X) is less than the amount of goods that a country
imports (M), there is a balance of payments deficit because X.

Inflation is the amount that the cost of goods and services within an economy has increased over a given
time period (usually measured over a year). In the UK, this is measured using the Consumer Price Index
(CPI). Inflation is damaging to an economy and this means that policymakers tend to try and keep
inflation low. For example, the Bank of England aim to set inflation at around 2%. There are 2 types of
inflation, cost-push inflation (which is caused by the costs of production for firms increasing, forcing
them to put their sale prices up) and demand-pull inflation (which is caused by growing demand for
goods that firms produce, allowing firms to increase prices to gain more profit).

Economic growth is the amount that the level of output within an economy increases over a given time
period (again usually measured over a year). Economic growth is extremely desirable as it means that, in
general, the people within an economy are getting richer. Economic growth can be increased in a
number of ways, such as technological improvement, an increase in the demand for goods and services,
and an increase in the size of the workforce (a fall in unemployment).

Unemployment is the amount of people within an economy who are willing and able to work, but do not
have a job. There are a number of different types of unemployment. Frictional unemployment (which is
unemployment caused by the search for a new job or a transition between jobs), structural
unemployment (caused by the decline of an industry, for example type-writing or coal mining), seasonal
unemployment (caused by the time of year, for example working on a Christmas tree farm is undesirable
during summer), and cyclical unemployment (which is caused by a recession – a reduction in the level of
output within an economy).
 2. Briefly explain expenditure approach method for GDP

The expenditure approach, expenditure method, or output approach is a way to calculate gross
domestic product (GDP).

It combines consumption, government spending, investment, and net exports. Essentially, the
expenditure approach dictates that everything that both the private sector and government spend
within a certain country must add up to the total value of all finished goods and services produced in a
certain period of time. Total spending should equal to total production. Distinct from the income
approach, the expenditure approach is the most common method for calculating GDP (nominal GDP),
which can then be adjusted for inflation in order to arrive at real GDP.

The purpose of the expenditure approach is to calculate GDP in terms of the amount of money spent
within a country’s borders.

It is the most widely used method for calculating GDP, by totaling four principal expenditures:

 Consumption by households
 Government spending on goods and services
 Business investment
 Net exports

Since expenditure is a symptom of and synonymous with demand, an increase in aggregate demand will
always be seen within the expenditure approach as both will ultimately show an increase in GDP.

The expenditure method is used to calculate GDP by considering consumer, investor, and government
spending as well as exports and imports. This can be expressed in a mathematical formula:

GDP=C+I+G+(X−M)

In this formula:

 GDP=Gross National Product or national income

 C=Consumer spending on goods and services (final consumption expenditure or personal

 I=Investor spending on business capital goods (gross investment)

 G=Government spending on public goods and services (government consumption)

 X=Exports of goods

 M=Imports of goods
 3. Discuss the limitations of GDP

GDP is a useful indicator of a nation’s economic performance, and it is the most commonly used
measure of well-being. However, it has some important limitations, including:

 The exclusion of non-market transactions

4. Discuss why unemployment happened in a country?

When businesses fail, under the normal operation of markets the assets of the business are sold off to
other businesses and the former employees are rehired by other competing businesses. In a recession,
because many businesses across many different industries and markets are failing all at once, the
number of unemployed workers looking for new jobs goes up rapidly. The available supply of labor
available for immediate hire goes up, but the demand to hire new workers by businesses goes down. In
a perfect, frictionlessly functioning market, economists would expect such an increase in supply and
decrease in demand to result in a lower price (in this case the average wage) but not necessarily a lower
total number of jobs once the price adjusts. 

However, this does not necessarily happen during recessions. The unemployed workers face difficulty in
finding new jobs, and the result is a surplus of labor of many kinds that can persist for many months. The
amount of unemployment that can be attributed to the job losses and delay in unemployed workers
finding new jobs due to the recession (above and beyond the normal unemployment associated with
day-today labor market turnover) is known as cyclical unemployment. 

Several factors particular to labor markets and to the conditions of a recession can interfere with the
normal process of adjusting jobs, wages, employment levels: