Macroeconomics
Macroeconomics in HKDSE Economics studies economy-wide outcomes: national income, unemployment, inflation, money and banking, fiscal and monetary policy, the balance of payments and exchange rates. Paper 1 tests definitions and calculations; Paper 2 data-response questions require policy transmission and evaluation.
Core rules
- GDP by expenditure = C + I + G + X − M. Include final goods only; exclude intermediate goods, transfer payments, second-hand assets and pure financial transactions. GNP = GDP + net factor income from abroad.
- Nominal GDP uses current prices; real GDP uses constant prices. GDP deflator = nominal GDP ÷ real GDP × 100. Real GDP per capita = real GDP ÷ population.
- Unemployment rate = unemployed ÷ labour force × 100. Labour force = employed + unemployed. Discouraged workers who stop searching leave the labour force, so the measured rate can fall even when joblessness is unchanged.
- Inflation is a sustained rise in the general price level. The CPI uses a fixed basket. Demand-pull inflation comes from aggregate demand growth; cost-push inflation comes from input costs or supply shocks. Unanticipated inflation helps borrowers and hurts lenders; anticipated inflation is built into contracts.
- Fiscal policy changes government spending and taxes; expansionary policy raises aggregate demand but may crowd out private investment. Monetary policy changes money supply or interest rates; Hong Kong’s linked exchange rate system (7.75–7.85 per US dollar) constrains independent interest-rate setting.
- The current account records goods, services, income and transfers; the capital/financial account records asset flows. A current account deficit must be financed by a surplus elsewhere.
Worked example
C = 500, I = 120, G = 180, X = 200, M = 160. GDP = 500 + 120 + 180 + 200 − 160 = 840. Net factor income from abroad = −30, so GNP = 810. If the GDP deflator is 105, real GDP = 840 ÷ 1.05 = 800. With population 40, real GDP per capita = 20. A $50 transfer payment is excluded from GDP because it is not payment for current output.
Traps that cost marks
- Counting intermediate goods, transfer payments or second-hand sales in GDP.
- Confusing GDP with GNP; factor income abroad belongs in GNP.
- Using nominal GDP when the question asks for real output.
- Forgetting to divide by population for per-capita figures.
- Treating a falling unemployment rate as an improvement when the labour force has shrunk.
- Confusing a budget deficit with public debt; a deficit is a flow, debt is a stock.