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# Macroeconomics Examples

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Have you ever wondered how macroeconomic examples affect our daily life? Macroeconomics is the study of the economy as a whole. If the government tries to raise interest rates in order to combat creeping inflation, it will have a direct impact on you. How, you might ask? If interest rates are higher, then you will get more interest on your savings. However, if you plan to borrow money, then higher interest rates mean that you will have to pay more in interest. This is a macroeconomic decision example that affects you in everyday life. Read on to find out more relevant and interesting macroeconomic examples!

## Examples of macroeconomic variables

Some examples of macroeconomic variables that are used all the time and you need to be aware of are:

• economic output
• unemployment
• inflation.

Let's go through each of them in turn and gauge how we can use them to inform ourselves about the macroeconomic climate as well as utilise them in our analysis of macroeconomic examples.

### Economic output

Economic output is one of the most important macroeconomic variables.

Economic output is the value of all goods and services sold in a country.

But how is economic output measured? Counting the total sales in an economy in itself doesn't actually give the figure of the value added to the economy. This is because intermediate sales are counted twice in economic output. Let's consider an example below.

A restaurant bought vegetables from a farmer for £100. The restaurant adds value by preparing some dishes with those vegetables and selling them for £500 in total.

The economic output becomes:

£100 (the value of the vegetables sold by the farmer) + £500 (the value of the dishes sold by the restaurant) = £600.

As you can see, the price of the vegetables is counted twice. Once when the farmer sold them and then when a restaurant sold them. Hence, while calculating national economic output, intermediate sales are subtracted from the total output. Gross domestic product (GDP) is a widely accepted measure of national economic output.

#### GDP as a measure of economic output

Gross domestic product (GDP) is often used as a measure of economic output.

Gross domestic product is the market value of all final goods and services produced in a year in a country.

There are different methods to calculate GDP. The most common method is the expenditure method, which looks at the demand side. According to that method:

$$GDP = C + I + G + (X – M)$$

Where,

$$C$$ = Final consumption expenditure on all goods and services

$$I$$ = Final investment expenditure

$$G$$ = Government expenditure

$$(X-M)$$ = Net exports

You can learn more about the GDP and its calculation methods in our articles:- Gross Domestic Product

- Nominal GDP vs Real GDP

### Unemployment rate

The unemployment rate is another example of a macroeconomic variable. For every economy, there is an acceptable rate of unemployment. The acceptable rate of unemployment is when the economy is producing goods and services at its full capacity. This is called the natural rate of unemployment.

But what is unemployment?

An unemployed person is someone who has been actively looking for work for some time. A person should be of working age, should be available to work, and should be looking for work to be counted as unemployed.

The unemployment rate, denoted by $$U$$ is calculated as follows:

$$U=\frac{\hbox{Unemployed population}}{\hbox{Working population + Unemployed population}} \times 100$$

We've got you covered on the topic of unemployment!

Check out these articles:

### Inflation

Inflation is another example of an important macroeconomic variable.

The increase in the price of goods and services over time is called inflation.

Inflation indicates that the economy is growing, but high inflation is harmful. Inflation and unemployment rates are related to each other. If inflation increases, firms will produce more goods as their goods can be sold for more on the market. To do that, they will employ more people. Hence if inflation increases, unemployment decreases.

To find out more about the relationship between inflation and unemployment, check our explanation:

- Phillips curve.

## Examples of macroeconomic issues

Let's take a look at some examples of macroeconomic issues such as:

### Examples of macroeconomic issues: Recessions

A recession is a significant decline in economic activity which lasts for months or years. In the UK, a recession is defined as negative economic growth for two consecutive quarters. Recession is a normal part of the economic cycle. Like night and day, a growth period comes after a decline.

A Recession is defined as negative economic growth for at least two consecutive quarters.

A severe recession is called a depression. Recessions have an adverse impact on the economy. The most prominent example of a recession in history was the Great Depression.

#### The Great Depression

The Great Depression was the longest-ever economic downfall. It began in 1929 with a stock market crash and investor panic and lasted for 10 years. According to monetarist views, the US Federal Reserve's lack of monetary actions caused it, and according to Keynesian views, it happened due to a decrease in aggregate demand.

During the time of the Great Depression, unemployment increased significantly, world trade decreased, and many banks failed to survive.

### Examples of macroeconomic issues: inflation and deflation

Inflation and deflation can become serious macroeconomic issues. If inflation is too high, it can lead to hyperinflation, where the rate of price increase becomes so high that everything goes out of control. There is little that can be done policy-wise, and people's savings become worthless. Deflation, on the other hand, is when the prices are falling. It is an indicator of insufficient money supply in the economy and is particularly dangerous due to the probability of deflationary spirals. These occur when deflation affects the circular flow of income in a way that deflation in itself becomes a self-reinforcing loop.

Let's take a closer look at two examples of macroeconomic issues: Yugoslavia and Japan.

#### Hyperinflation in Yugoslavia

An example of hyperinflation is the former Yugoslavia in the 1990s. On the brink of collapse, the country had already been suffering from high inflation rates of over 75% per year. The hyperinflation rate was doubling daily until it reached 313 million per cent in the month of January 1994. Lasting over 24 months, this was the second-longest hyperinflation ever recorded, with the number one spot belonging to Russia in the 1920s, which was over 26 months long.1

#### Japan's Deflation

The prices of goods and services in Japan decreased from 1991 to 2001. This was the country's first lost decade. However, according to some economists, since then, Japan has been going through a deflationary spiral, and thus, the lost decades continue.

Japan was caught in a cash liquidity trap after the burst of the real-estate bubble. Citizens were saving money but were not spending it. The central bank in Japan failed to take corrective actions in time. To stop deflation, Japan introduced negative interest rates, but now they are unable to increase interest rates back to positive.

You are invited to explore these topics in more detail in our articles:

- Hyperinflation

## Macroeconomic shocks examples

Let's take a look at some examples of macroeconomic shocks such as:

### Oil Crisis (1973)

In the 1970s, Arab nations of OPEC (Organization of the Petroleum Exporting Countries) put an embargo on exporting oil to the US and Europe due to a political situation between Egypt and Israel and the devaluation of the dollar. To cope with the lost export revenues, OPEC countries quadrupled the oil prices and reduced oil production. The hike in oil prices from $2 to$12 per barrel trickled to other sectors, quickly giving rise to high inflation.2

Dive deeper into this topic by clicking here:

### Argentine Great Depression

The Argentine Great Depression happened between 1998– 2002. External crisis and implementation of bad monetary and fiscal policies pushed the Argentinian economy into a depression. After 2003, Argentina started promoting exports and tourism. This contributed hugely to the recovery of the economy. Argentina entered the recovery phase in 2009 and continued steadily improving its economy.

We've covered this topic in much more detail in our article:

Don't forget to check it out!

### Crisis in Venezuela

The Venezuelan economy was highly dependent on oil exports, and the government used all the oil export income for government spending. However, due to the high exchange rates for oil, the demand for Venezuelan oil drastically decreased.

In 2010, it was not sustainable for the government to keep funding social projects. In 2014, Venezuela entered into a recession, and by 2016 inflation reached its highest point in the history of the country: 800%.3

If you are interested in this macroeconomic example, then you definitely don't want to miss our article:

## Macroeconomic stability examples

Although there are many examples of macroeconomic issues and shocks, there are also great examples of macroeconomic stability.

Some examples of macroeconomic stability are:

• Chinese economy
• Nordic model
• Singapore economy

### Chinese economy

In China, pure capitalism operates with state-owned enterprises. Manufacturing, labour, and agriculture are major contributors to the Chinese economy. China's sustained economic growth was often referred to as an 'economic miracle.'

Although the economic growth rate of China is now moving at a slower pace due to economic imbalances, environmental issues, and social imbalances, their economy is still growing.

China can tackle this by concentrating on making the economy more reliant on the service sector, promoting the private sector, and some fiscal reforms. According to the World Bank, China should concentrate on moving towards a sustainable and more carbon-neutral economy.

### Nordic model

Sweden, Norway, Denmark, Finland, and Iceland together follow the Nordic model, which is a combination of capitalism and socialism in social welfare and economic system. The key points of the Nordic model are no minimum wage, low corruption, strong property rights, a high tax burden, a public pension system, welfare, and a high level of equality.

Some criticise the model for being unsustainable because of the ageing population, immigration, high levels of taxation, and government intervention.

Our article on the Nordic Model describes this topic in a lot more detail! Don't miss it!

### Singapore's economy

Singapore's economy has benefitted from globalisation. Since establishing a free market economy, it has developed trading agreements with countries like the US, China, Malaysia, Indonesia, and Japan. Singapore's economy now blooms in many sectors, such as port trading, tourism, and services, like banking, biotech, and oil.

Did you know that Singapore's economy is one of the four strong economies in Asia, which are called the 'Four Asian Tigers'?

- Four Asian Tigers

## Macroeconomic Trends Examples

Now that you've learned so many macroeconomic examples as well as the most important variables let's apply those and take a look at some macroeconomic trends examples!

We will take a closer look at the following:

• UK unemployment
• UK post-Brexit

### Unemployment in UK

The unemployment rate in the UK in the fourth quarter of 2021 stood at 4.1%. This means that there were more than 1.3 million unemployed people in the UK at the time. The unemployment rate in the UK is gradually following a downward trend. It is currently falling, but it is still yet to reach the pre-pandemic rate of 4%.4

Fig. 1 - Unemployment rates in the UK, 2006-2021. Source: Office for National Statistics4

Figure 1 above shows how unemployment in the UK was high in the years 2006 to 2013. It was gradually decreasing until the pandemic hit in 2020.

Hungry for more? Why not check out:

- United Kingdom Economy

### UK post-Brexit

The United Kingdom's economy is a free market economy where buyers and sellers make decisions and are not controlled by government policies. The service sector contributes 72.79% to this fifth-largest economy.5

The economy also relies on imports. Imports are double the exports in monetary value. The main imports are machinery, transportation equipment, food, fuel, and chemicals. The exports are cars, crude oil, and pharmaceuticals. The US and Europe are the main trading partners of the UK.

In the last few years, the growth of the UK economy has slowed down, and inflation is rising as a combined effect of Brexit and the Covid-19 pandemic.

You can read more about the economic implications of Brexit in our articles:

- Consequences of Brexit

- Impact of Brexit on UK economy- Impact of Brexit on EU economy

## Macroeconomics Examples - Key takeaways

• Some examples of macroeconomic variables are:
• economic output
• unemployment
• inflation.
• Some examples of macroeconomic issues are:
• recessions (The Great Depression)
• inflation and deflation (Yugoslavia and Japan)
• Some examples of macroeconomic shocks are:
• Oil Crisis (1973)
• Argentine Great Depression
• Crisis in Venezuela
• Some examples of macroeconomic stability are:
• Chinese economy
• Nordic model
• Singapore economy
• Some macroeconomic trends examples are:
• UK unemployment
• UK post-Brexit

## References

1. Pavle Petrovic, The Yugoslav Hyperinflation of 1992-1994, http://yaroslavvb.com/papers/petrovic-yugoslavian.pdf
2. The National Archives, World recession and the oil crisis, https://www.nationalarchives.gov.uk/cabinetpapers/themes/world-recession-oil-crisis.htm
3. CNBC, Venezuela 2016 inflation hits 800 percent, GDP shrinks 19 percent, https://www.cnbc.com/2017/01/20/venezuela-2016-inflation-hits-800-percent-gdp-shrinks-19-percent-document.html
4. Office for National Statistics, Employment and labour market, https://www.ons.gov.uk/employmentandlabourmarket/peoplenotinwork/unemployment
5. Statista: GDP distribution across economic sectors in the UK, https://www.statista.com/statistics/270372/distribution-of-gdp-across-economic-sectors-in-the-united-kingdom/

To tackle the recent financial crisis, the UK government introduced an expansionary fiscal policy. It included a temporary cut in VAT.

The central bank in the country can introduce monetary policy under government guidance. Monetary policy controls the money supply and interest rates in the whole economy. Hence, monetary policy is not a microeconomics example but a macroeconomics one.

The Financial Crisis (2008–09) is a real-life macroeconomics example. The UK government took some steps to come out of the recession including a cut in interest rates, expansionary fiscal policy, and bank rescues.

Yes, national income is studied under macroeconomics. The most commonly used indicator for national income is GDP.

Some Macroeconomics examples in the real world include the Chinese Economy, Nordic Model, the United Kingdom economy, the Cuban Economy, and Singapore’s economy.

## Final Macroeconomics Examples Quiz

Question

Define supply-side policies.

Supply-side policies are policies that aim to increase productivity and efficiency in the economy.

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What is the objective of supply-side policies?

The objective of supply-side policies is to boost aggregate supply (AS) to result in increased output.

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How do supply-side policies impact the LRAS curve?

They aim to shift the LRAS curve to the right.

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How do supply-side policies aim to reduce inflationary pressure?

By removing market imperfections.

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What are the two types of supply-side policies?

Free market and interventionist policies.

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What do free market supply-side policies aim to encourage?

Competition, market reform, and incentives.

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What is privatisation?

When the government sells its previously state-owned assets to private individuals or companies.

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Deregulation can:

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Name an example of trade liberalisation.

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How could decreasing corporate taxes impact aggregate supply?

Decreasing corporate taxes can allow firms to retain more of their profit and invest it back into the economy, increasing the output of the economy and shifting LRAS to the right.

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What are interventionist supply-side policies?

Interventionist supply-side policies are policies that require government intervention to boost the economy.

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Name two examples of interventionist policies.

Investment in human capital and investment in new technology.

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Which of the following is NOT an interventionist policy?

Reducing unemployment benefits.

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Name two advantages of supply-side policies.

Sustainable growth and the ability to increase employment.

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Name two limitations of supply-side policies.

Time lag and costs.

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What is aggregate supply?

Aggregate supply (AS) is a measure of the total volume of goods and services produced in the economy over a given time period.

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Name two types of aggregate supply.

Short-run and Long-run

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What remains constant in the movement along the aggregate supply curve?

Other factors

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What changes in the shift of the aggregate supply curve?

Other factors

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Which is the vertical aggregate supply curve?

The long-run aggregate supply curve

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What is the Phillips curve relationship?

The Phillips curve relationship is an inverse statistical relationship between the rate of inflation and the rate of unemployment.

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How is the Phillips curve drawn?

The Phillips curve is drawn as a downward sloping smooth curve in the unemployment-inflation plane.

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How are the rate of inflation and the rate of unemployment related according to the Phillips curve relationship?

The rate of inflation and the rate of unemployment are inversely related. As the rate of unemployment decreases, the rate of inflation increases and vice versa.

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How many inflation theories does the Phillips curve relationship explain?

Two inflation theories.

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Which inflation theories does the Phillips curve relationship explain?

The Phillips curve relationship explains demand-pull inflation and cost-push inflation theories.

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What is the cause of demand-push inflation?

Excess demand in the economy.

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What is the cause of cost-pull inflation?

Rising costs of production due to trade unions bargaining for higher wages on behalf of the employees.

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What is the long-run Phillips curve?

The long-run Phillips curve is a vertical line crossing the short-run Phillips curve at a point where the short-run Phillips curve crosses the horizontal axis.

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At which point does the long-run Phillips curve cross the short-run Phillips curve?

A point where the inflation rate is zero and unemployment rate is called the natural rate of unemployment.

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What is the natural rate of unemployment?

The natural rate of unemployment is the long-run level of unemployment below which employment can’t increase without accelerating the rate of inflation.

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Why is the long-run Phillips curve vertical?

The long-run Phillips curve is vertical at the natural rate of unemployment because the trade-off relationship between the rate of unemployment and the rate of inflation disappears in the long-run.

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What does the Phillips curve predict?

The Phillips curve predicts a trade-off between the rate of unemployment and the rate of inflation.

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Why is the Phillips curve important?

The Phillips curve is an important tool for the government policy of reducing the rate of unemployment in the economy whilst taking into account the rate of inflation.

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Adaptive expectations are a type of agents’ expectation formation about the future solely based on the values observed in the current and recent past periods.

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What are rational expectations?

Rational expectations  are a type of agents’ expectation formation about the future based on all the observed data (current and past), whilst acting in their full self-interest.

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Can unemployment be reduced in the long run?

Unemployment can be reduced in the long run if the government implements appropriate supply-side policies to reduce the natural rate of unemployment.

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What will be a result of a supply-side policy targeted at reducing the natural rate of unemployment in the long-run?

Shift in the LRPC

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What will be a result of a demand-side policy targeted at reducing the natural rate of unemployment in the short-run?

Movement along the SRPC

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What does the trade-off region on the Phillips curve represent?

The trade-off region on the Phillips curve represents the government's options. There are several policy choices that a government can pursue when targetting a particular level of employment and inflation.

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Which expectation theory underpins the short-run Phillips curve?

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Who suggested the other concept of LRAS?

Keynesians.

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When does macroeconomic equilibrium occur?

Macroeconomic equilibrium occurs when aggregate demand meets aggregate supply.

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How can we determine the output gap?

The output gap is the difference between the actual output and the potential or trend output.

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What are the types of the output gap?

1. Positive output gap
2. Negative output gap

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What is a positive output gap?

A positive output gap occurs when the actual output is above the potential or trend output.

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What is a negative output gap?

A negative output gap occurs when the actual output is below the potential or trend output.

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What is Gross Domestic Product?

Gross domestic product (GDP) is the total economic activity (total output or total income) in a country's economy.

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Question

There are ____ ways of measuring GDP.

3

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What are the three ways of measuring GDP?

Expenditure, income and output.

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Question

Explain the output approach of measuring GDP.

This approach includes adding up the total value of final goods and services produced in a country's economy over a period of time.

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