ACJC H2 Domestic Macro Issues Part 1 - Standard of Living

1 ©ACJC Econs Dept/2024/H2 Domestic Macroeconomic Problems ANGLO-CHINESE JUNIOR COLLEGE JC2 Economics H2 DOMESTIC MACROECONOMIC ISSUES (1) STANDARD OF LIVING Section Content Page Overview 1: Macroeconomic Aims in Relation to Standard of Living 4 1 STANDARD OF LIVING 5 1.1 Material SOL Indicator: Gross Domestic Product (GDP) 5 1.2 Material SOL Indicator: Gross National Product (GNP) 6 1.3 Differences between GDP and GNP 6 1.4 Measuring and Comparing Material SOL 7 1.5 Limitations of Measuring and Comparing Material SOL using National Income Statistics 11 1.6 Sufficiency of National Income Statistics as a measurement of SOL 14 1.7 Use of composite indicator like Human Development Index (HDI) in measuring and comparing standard of living 14 1.8 A non-material SOL Indicator: Gini Coefficient 16 Learning Reflection 19

2 ©ACJC Econs Dept/2024/H2 Domestic Macroeconomic Problems WHAT IS THIS TOPIC ABOUT? The overall aim of governments is to attain the highest possible standard of living for all residents in their countries with the available resources and technology. The key to achieving high and rising standard of living is a strong and stable macroeconomic performance. It is through sustainable economic growth, rising income and high employment level in the labour market that a population can enjoy high material standard of living. In the earlier set of notes on Introduction to Macroeconomics, you have le arnt that standard of living has both the material and non-material aspects, as such we should be aware that by improving on the material aspect of standard of living is insufficient on its own because the non-material aspect is just as important. This new topic of Domestic Macroeconomic Aims & Problems will take you to understand these two big areas of focus: 1. How standard of living is measured and the limitations in using national income figures to measure living standards. 2. The causes of domestic macroeconomic problems, and the consequences of these problems on current and future standard of living. Keep connected to the key ideas you have learnt in the previous topic of Introduction to Macroeconomics because these are needed for you to understand the causes of macroeconomic problems. Macroeconomic problems come about from the imbalances between AD an d AS and these imbalances will pose challenges to the government in achieving its aim of raising standard of living. LEARNING OUTCOMES Enduring Understanding: • A comprehensive measure of standard of living should take into consideration both material and non-material conditions affecting individuals in a country. • Macroeconomic problems are caused by a confluence of internal and external conditions, often interrelated in nature, affecting a country’s aggregate demand and aggregate supply, hence national income and general price level. • Both the country’s national income and general price level will thus affect the overall standard of living, directly and indirectly. Overarching Essential Questions: • Does a better economic performance of a country always lead to an improvement in its living standards? • Can a country achieve all four macroeconomic goals at any one point in time?

3 ©ACJC Econs Dept/2024/H2 Domestic Macroeconomic Problems Article: How the Covid-19 pandemic affective liveability worldwide The Global Liveability Index 2021 Rank City Location 1 Auckland New Zealand 2 Osaka Japan 3 Adelaide Australia 4 Wellington New Zealand 5 Tokyo Japan 6 Perth Australia 7 Zurich Switzerland 8 Geneva Switzerland 9 Melbourne Australia 10 Brisbane Australia The pandemic has caused huge volatility in The Economist bi-annual Liveability index, which ranks 140 cities across five areas: stability, healthcare, education, culture and environment, and infrastructure. (For a full methodology, see page 6.) Data for this survey were gathered between February 22nd and March 21st 2021, when cities were at different stages of their battle with the pandemic The new leader is Auckland. Owing to border closures and a consequently low Covid-19 case count, New Zealand has been able to keep its theatres, restaurants and other cultural attractions open. Students have been able to continue going to school, giving Au ckland a 100% score for education. This has allowed the city to move up from sixth place in our autumn 2020 survey to first position in our March 2021 rankings. In third place is Adelaide in Australia, which also imposed a ban on international travel. Thre e more Australian cities —Perth, Melbourne and Brisbane—appear in the top ten, with Sydney in 11th place. The Swiss cities of Zurich and Geneva also maintained their places in the top ten, despite some social restrictions still being in place. Further down the rankings, the picture is grimmer, particularly in Europe. Vienna, capital of Austria, occupied the top spot throughout 2018-20 but has slipped down to 12th place for the current survey, following the second Covid -19 wave. In Germany, Frank furt, Hamburg and Dusseldorf have seen the biggest falls in ranking of all our 140 cities. Canadian cities such as Montreal, Vancouver, Calgary and Toronto, which have previously scored highly, have also slipped. The downward movement in rankings for the E uropean and Canadian cities can be attributed to the heightened stress on healthcare resources during the second wave of the pandemic. Source: The Economist Intelligence Unit Questions: 1. State the factors that were considered in measuring a city’s standard of living. 2. Explain possible reasons why New Zealand and Australia dominate the top ten list of the most liveable cities.

4 ©ACJC Econs Dept/2024/H2 Domestic Macroeconomic Problems Failure to achieve the above macroeconomic objectives will result in macroeconomic issues within the country. To summarise these macroeconomic issues and its conditions, refer below: *You are to refer to the Introduction to Macroeconomics notes issued in JC1 for the explanation of each of the above macroeconomic objectives and the indicators used to assess the performance of the economy in those areas. Overall aim of government: Improve overall standard of living Internal Macroeconomic Objectives Sustainable and Inclusive Economic Growth Full Employment Low and stable Inflation External Macroeconomic Objective Favourable and Balance of Trade (small surplus) •Negative economic growth / recession •Unsustainable but positive economic growth •Non-inclusive growth Undesirable Economic Growth •High unemployment due to poor / lack of demand •High unemployment due to mismatched skills High unemployment rate •Rapidly rising general price level •Rapidly falling general price level (deflation) •Unstable rise and fall of general price level Price instability • Persistent and large BOT deficit • Persistent and large BOT surplusUnfavourable BOT position Overview 1: Macroeconomic aims in relation to Standard of Living

©ACJC Econs Dept/2024/H2 Domestic Macroeconomic Problems 5 1. STANDARD OF LIVING (SOL) Standard of living can be measured in material and non-material terms. In material terms, it refers to the amount of goods and services available for a country’s citizens / residents for consumption. This can be measured by the national output, which is the amount of goods and services produced in the economy, and the per capita earnings, which is the average income per person in the country. In non-material terms, it refers to the qualitative aspects of life such as quality of health, education, environment, and amount of leisure time. These qualitative aspects of life can be measured by indicators such as life expectancy, education level, air quality index etc. While not exhaustive, Figure 1 highlights some indicators that economists look at to measure a country’s standard of living. 1.1 Mat