Government Economic Service (GES) Assessment Centre Macroeconomics and the UK Economy Syllabus

Macroeconomics and the UK Economy syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Macroeconomics and the UK Economy in Government Economic Service (GES) Assessment Centre, not a summary of it.

1. 1

   National Income and Output

   4 topics

   • Measuring GDP and the circular flow
     • Expenditure, income and output approaches
     • Nominal vs real and GDP deflator
   • Aggregate demand and aggregate supply
     • Short-run and long-run AS
   • Economic growth and productivity
     • The UK productivity puzzle
     • Total factor productivity
   • The output gap and business cycles
2. 2

   Inflation, Unemployment and Labour Markets

   4 topics

   • Causes and measurement of inflation
     • CPI vs RPI and target setting
     • Demand-pull vs cost-push
   • Unemployment types and measurement
     • Claimant count vs Labour Force Survey
   • The Phillips curve and expectations
     • NAIRU and the long-run vertical curve
   • Wage setting, skills and labour supply
3. 3

   Monetary Policy and the Bank of England

   4 topics

   • The Monetary Policy Committee and the 2% target
   • Transmission mechanism of interest rates
   • Quantitative easing and unconventional policy
     • Asset purchase facility
     • Quantitative tightening
   • Central bank independence and credibility
4. 4

   Fiscal Policy and the Public Finances

   4 topics

   • Government spending, taxation and the deficit
     • Cyclical vs structural deficit
   • Fiscal rules and the OBR
     • Debt and borrowing sustainability
   • Automatic stabilisers and discretionary policy
   • Multipliers and crowding out
5. 5

   Open Economy Macroeconomics

   4 topics

   • Balance of payments and the current account
   • Exchange rate regimes and determination
     • Purchasing power parity
   • Trade theory and comparative advantage
     • Brexit and UK trade policy
   • Global shocks and policy coordination

Macroeconomics and the UK Economy flashcards for Government Economic Service (GES) Assessment Centre

19 of 50 cards from the Macroeconomics and the UK Economy deck — real questions with worked answers.

1. How is GDP defined, and what are the three equivalent methods of measuring it?

   GDP is the total market value of all final goods and services produced within a country's borders in a given period. The three methods are: (1) the output (value-added) method, summing value added across firms; (2) the income method, summing wages, profits, rent and interest; and (3) the expenditure method, $GDP = C + I + G + (X - M)$. All three give the same total.

2. In the circular flow of income, what are the three injections and three withdrawals (leakages)?

   Injections are investment ($I$), government spending ($G$) and exports ($X$). Withdrawals (leakages) are saving ($S$), taxation ($T$) and imports ($M$). The economy is in equilibrium when total injections equal total withdrawals: $I + G + X = S + T + M$.

3. What is the difference between nominal GDP, real GDP, and the GDP deflator?

   Nominal GDP is measured at current prices; real GDP is measured at constant (base-year) prices, removing inflation. The GDP deflator converts between them: $\text{GDP deflator} = \frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100$.

4. Distinguish GDP from GNI (GNP) and from net national income.

   GDP measures output produced within a country's borders. GNI (GNP) adds net property income from abroad (income earned by residents abroad minus income paid to foreigners): $GNI = GDP + \text{net income from abroad}$. Net national income further subtracts depreciation (capital consumption).

5. What are the components of aggregate demand and the standard AD identity?

   Aggregate demand is total planned real expenditure at each price level: $AD = C + I + G + (X - M)$, where $C$ is consumption, $I$ investment, $G$ government spending, and $(X-M)$ net exports.

6. Why does the aggregate demand curve slope downwards?

   Three effects: (1) the real-balance (Pigou) effect—lower prices raise the real value of wealth, boosting consumption; (2) the interest-rate (Keynes) effect—lower prices reduce money demand and interest rates, raising investment; and (3) the international trade (net-export) effect—lower domestic prices make exports more competitive, raising net exports.

7. Distinguish the short-run aggregate supply (SRAS) curve from the long-run aggregate supply (LRAS) curve.

   SRAS slopes upwards because nominal wages and some prices are sticky, so higher prices raise profit margins and output. LRAS is vertical at the full-employment (potential) level of output $Y^{*}$, determined by factor quantities and productivity, independent of the price level. In the long run output returns to $Y^{*}$.

8. In the AD-AS model, contrast a Keynesian and a Classical (monetarist) view of the long-run AS curve.

   The Classical/monetarist view holds LRAS is vertical at full employment, so demand changes only affect prices in the long run. The Keynesian LRAS is L-shaped: horizontal at low output (spare capacity, so demand raises output without inflation) and vertical at full capacity, justifying demand management when resources are idle.

9. Define economic growth and distinguish actual growth from potential (trend) growth.

   Economic growth is the increase in real GDP over time. Actual growth is the realised change in real output (often demand-driven, using spare capacity), shown as movement toward the PPF. Potential (trend) growth is the increase in productive capacity—an outward shift of the PPF or rightward shift of LRAS.

10. How is labour productivity defined and measured, and why does it matter for growth?

    Labour productivity is output per unit of labour input, e.g. $\text{Productivity} = \frac{\text{Real output}}{\text{Hours worked}}$ (output per hour) or output per worker. It is the principal driver of long-run growth and rising living standards; the UK's persistent post-2008 'productivity puzzle' is weak productivity growth.

11. What is total factor productivity (TFP) and how does it relate to the growth-accounting equation?

    TFP is the part of output growth not explained by increases in measured labour and capital inputs—it reflects technology, efficiency and innovation. In growth accounting, $\Delta Y = \Delta A + \alpha \Delta K + (1-\alpha)\Delta L$, where $\Delta A$ is TFP growth and $\alpha$ is capital's income share.

12. Define the output gap and distinguish a positive from a negative output gap.

    The output gap is the difference between actual and potential output, often $\text{Gap} = \frac{Y - Y^{*}}{Y^{*}} \times 100$. A positive gap ($Y > Y^{*}$) means the economy is overheating with inflationary pressure; a negative gap ($Y < Y^{*}$) means spare capacity, downward price pressure and cyclical unemployment.

13. What are the four phases of the business cycle?

    (1) Boom/peak—output above trend, rising inflation, low unemployment; (2) Downturn/contraction—growth slows; (3) Recession/trough—falling real GDP (technically two consecutive quarters of negative growth), rising unemployment; (4) Recovery/expansion—output rises back toward and above trend.

14. What is the technical definition of a recession used in the UK?

    A recession is conventionally defined as two consecutive quarters of negative real GDP growth (a fall in real output). A depression is a deeper, more prolonged slump, sometimes taken as a fall in real GDP of around 10% or more, or lasting several years.

15. Define inflation, deflation and disinflation.

    Inflation is a sustained rise in the general price level (fall in money's purchasing power). Deflation is a sustained fall in the general price level (negative inflation rate). Disinflation is a fall in the rate of inflation—prices still rise but more slowly.

16. How is the UK CPI constructed, and how does it differ from CPIH and RPI?

    CPI measures the change in the price of a representative weighted basket of goods and services bought by households, using a Laspeyres-type index. CPIH additionally includes owner-occupiers' housing costs and council tax. RPI (an older, no-longer-national-statistic measure) includes mortgage interest and uses an arithmetic-mean formula, so it typically reads higher than CPI.

17. Distinguish demand-pull from cost-push inflation.

    Demand-pull inflation arises when aggregate demand exceeds aggregate supply near full capacity (rightward AD shift), pulling prices up. Cost-push inflation arises from rising costs of production—wages, raw materials, energy or import prices—shifting SRAS leftwards, raising prices while reducing output.

18. According to the quantity theory of money, what is the equation of exchange and its implication for inflation?

    The Fisher equation of exchange is $MV = PY$, where $M$ is money supply, $V$ velocity, $P$ the price level and $Y$ real output. If $V$ and $Y$ are stable, a rise in $M$ raises $P$ proportionally—monetarists conclude that 'inflation is always and everywhere a monetary phenomenon'.

19. How does the UK measure unemployment, and what is the difference between the ILO/LFS measure and the claimant count?

    The headline ILO measure (from the Labour Force Survey) counts people without a job who are available to start within two weeks and have actively sought work in the past four weeks. The claimant count records those claiming unemployment-related benefits (e.g. Universal Credit/JSA), which is narrower and usually lower than the LFS measure.

See more Macroeconomics and the UK Economy flashcards →

Planning Macroeconomics and the UK Economy for Government Economic Service (GES) Assessment Centre

Macroeconomics and the UK Economy (Government Economic Service (GES) Assessment Centre) FAQ