ACCA Applied Knowledge · Business and Technology

Macroeconomic factors: formula sheet

Full chapter guide

Key formulas

Real GDP growth rate: Growth % = (Real GDP this year − Real GDP last year) ÷ Real GDP last year × 100; Use real GDP (adjusted for inflation), not nominal, when judging growth in output.
Inflation rate: Inflation % = (Price index this year − Price index last year) ÷ Price index last year × 100; Shows the percentage rise in the general price level over the year.
Unemployment rate: Unemployment rate % = Unemployed ÷ Labour force × 100; Labour force = employed plus unemployed people seeking work.
Current account balance: Current account = Exports of goods and services − Imports of goods and services + net income and transfers; A negative figure is a deficit. A simple trade balance uses only exports minus imports.
Economic growth rate: Growth % = (Real GDP this year − Real GDP last year) ÷ Real GDP last year × 100; Use real GDP, not nominal. A negative result means output has fallen.
Expenditure method of GDP: GDP = C + I + G + (X − M); C = consumer spending, I = investment, G = government spending, X = exports, M = imports.
GNP from GDP: GNP = GDP + income earned abroad by residents − income earned at home by foreigners; GDP is by location; GNP is by ownership or residence.
GDP per head: GDP per head = GDP ÷ population; Better than total GDP for comparing living standards.
Real GDP: Real GDP = Nominal GDP ÷ price index × 100; Strips out the effect of price changes.
Inflation rate: Inflation rate (%) = (Price index now − Price index a year ago) ÷ Price index a year ago × 100; A negative result means deflation. A smaller positive result than last year means disinflation.
Real value of money: Real value = Money amount ÷ Price index × 100; Use when comparing amounts across years. Index base year = 100.
Real interest rate (approximate): Real interest rate ≈ Nominal interest rate − Inflation rate; If inflation is higher than the nominal rate, the real rate is negative and savers lose purchasing power.
Demand-pull test: Demand-pull: aggregate demand rises faster than supply capacity; Look for rising spending, low interest rates, tax cuts, and low unemployment.
Cost-push test: Cost-push: production costs rise and are passed on in prices; Look for wage rises, commodity prices, energy costs, and weaker currency raising import costs.
Unemployment rate: Unemployment rate = (Number unemployed ÷ Labour force) × 100%; The labour force is the employed plus the unemployed. It excludes economically inactive people.
Labour force: Labour force = Employed + Unemployed; Do not use total population as the denominator.
Participation rate: Participation rate = (Labour force ÷ Working-age population) × 100%; Shows how much of the working-age population is active in the labour market.
Type matching rule: Between jobs = frictional; skills or location mismatch = structural; falling demand = cyclical; time of year = seasonal; wages too high = real-wage; Use the cause in the scenario to choose the type.
Budget balance: Budget balance = Government revenue (taxes) − Government spending; A negative result is a budget deficit. A positive result is a budget surplus. Zero is a balanced budget.
Expansionary fiscal policy: Lower taxes and/or higher spending → higher aggregate demand; Used to fight recession and unemployment. It tends to widen the deficit and may raise inflation.
Contractionary fiscal policy: Higher taxes and/or lower spending → lower aggregate demand; Used to fight inflation or reduce a deficit. It may slow growth and raise unemployment.
Public sector borrowing vs national debt: Annual borrowing = yearly deficit; National debt = total of accumulated borrowing; Borrowing is a flow per year. Debt is a stock built up over time.
Types of tax: Direct tax: on income or profit. Indirect tax: on spending.; Income tax and corporate tax are direct. Sales tax or VAT and excise duties are indirect.
Higher interest rates: Interest rate ↑ → borrowing ↓ and saving ↑ → spending and investment ↓ → inflation pressure ↓; Used to cool an overheating economy. Also tends to strengthen the currency.
Lower interest rates: Interest rate ↓ → borrowing ↑ and saving ↓ → spending and investment ↑ → growth ↑; Used to boost a weak economy. Also tends to weaken the currency. Too much can raise inflation.
Money supply: Money supply ↑ → demand ↑ → inflation risk ↑ (and the reverse); This is a tendency, not a certainty, because output and confidence also matter.
Quantitative easing: Central bank creates money → buys bonds → bond prices ↑ → long-term yields ↓ → lending and spending ↑; Used when the base rate is already very low.
Monetary versus fiscal policy: Monetary = central bank: interest rates, money supply, exchange rates. Fiscal = government: tax and spending.; A common test of definitions.
Balance of payments identity: Current account + Capital and financial account ≈ 0 (after balancing items); Overall, payments in equal payments out. A current account deficit is financed by a capital account surplus, such as borrowing or foreign investment.
Current account: Trade in goods + Trade in services + Income + Transfers; Goods are visible trade; services are invisible trade.
Converting currency: Foreign amount = Home amount × Rate (foreign per 1 home) ; Home amount = Foreign amount ÷ Rate; Check which currency is quoted per one unit of the other. Multiply or divide accordingly.
Effect of currency strength: Stronger home currency → exports dearer, imports cheaper ; Weaker home currency → exports cheaper, imports dearer; Assumes other things equal. The actual effect on volumes depends on demand elasticity.

Quick revision

Main macroeconomic aims: stable prices, low unemployment, economic growth and a balanced external position.
The business cycle moves through boom, recession, slump and recovery, and growth is measured by change in real output.
Demand-pull inflation comes from excess demand; cost-push comes from rising costs.
Inflation reduces the purchasing power of money; deflation is a sustained fall in the general price level.
Cyclical unemployment comes from low demand; structural unemployment from changes in industries or skills.
Fiscal policy means government spending and taxation decisions.
Monetary policy works through interest rates and the money supply.
Higher interest rates generally reduce borrowing, spending and investment.
Supply-side policies aim to raise the economy's productive capacity, such as through training and incentives.
Competition policy aims to limit abuse of market power and protect consumers.
A weaker domestic currency makes exports cheaper and imports dearer, other things equal.
Tariffs and quotas restrict imports; free trade agreements reduce such barriers.

Common mistakes

Saying low inflation means zero inflation. Fix: The aim is low, stable and predictable inflation, usually a small positive target.
Using nominal GDP to measure growth. Fix: Growth in output is measured with real GDP, which strips out price rises.
Treating GDP and GNP as the same thing. Fix: Remember GDP is output within the country; GNP is output by the country's residents anywhere.
Calculating growth from nominal GDP. Fix: Use real GDP. If given nominal GDP and a price index, convert first.
Calling falling inflation 'deflation'. Fix: Deflation means prices actually fall (negative inflation rate). If prices still rise, only more slowly, it is disinflation.
Labelling a wage rise as demand-pull. Fix: If the question stresses wages as a cost to firms passed into prices, choose cost-push. Choose demand-pull only if the focus is excess spending.
Confusing frictional and structural unemployment. Fix: Ask whether suitable jobs exist. If jobs exist and the person is just between them, it is frictional. If the person's skills or location do not fit the jobs available, it is structural.
Calling unemployment from a recession structural. Fix: If the cause is a general fall in demand across the economy, it is cyclical. If a particular industry is permanently shrinking, it is structural.
Confusing fiscal policy with monetary policy. Fix: Fiscal policy uses taxes, spending and borrowing. Monetary policy uses interest rates, money supply and credit. Link each tool to its policy.
Mixing up budget deficit and national debt. Fix: A deficit is the shortfall in one year. National debt is the total owed from all past borrowing. Think flow versus stock.

Exam tips

Know the four objectives by name and be ready to link each to a policy type.
For conflict questions, always state the cause and the effect, such as growth leading to more imports.
In number entry questions, check whether you need real or nominal figures, and round as instructed.
In multiple response questions, select exactly the stated number of options and check the direction of each effect.
Read 'expansionary' and 'contractionary' carefully. Mixing them up is the most common lost mark.
Check every time whether the figures are real or nominal before calculating growth.
Know the exact GDP versus GNP definitions; this is a favourite objective test item.
For cycle questions, learn the signs of each phase: output, unemployment, inflation and confidence.