Macroeconomic influences on the contemporary New Zealand economy

Macroeconomic influences refer to internal factors (for example, changes in government policies, consumption, savings, and investment) and external factors (for example, changes in net exports, terms of trade, exchange rates, trade agreements, and the world economy) that affect an economy.

Assessing the affect on the New Zealand economy involves comparing macroeconomic indicators used to describe the current state of the economy with the macroeconomic goals of government.

Key concept indicators

• Provides an explanation of the current state of the New Zealand economy by:
  • identifying the macroeconomic goals of government, including:
    • price stability
    • economic growth
    • full employment
    • international trade balance
  • calculating, processing, and/or researching to find the most up to date information on the NZ macroeconomic indicators related to the government’s macroeconomic goals. For example, the inflation rate, the growth rate, the current account balance, the unemployment rate and/or the current position on the business cycle
  • assessing the performance of the NZ economy by looking at the current state or trends in the macroeconomic indicators and how these match the macroeconomic goals.
• Identifies, defines, calculates, or describes macroeconomic influences on the New Zealand economy, including:
  • internal factors. For example, changes in government policies, consumption, savings and investment
  • external factors. For example, changes in net exports, terms of trade, exchange rates, trade agreements and the world economy.
• Illustrates concepts relating to macroeconomic influences on the New Zealand economy using economic models, including:
  • AS AD model - for example, to show the global recession on the NZ economy and its likely impact on inflation, economic growth and unemployment.
  • Circular flow model - for example, to illustrate the effect of big events (like the Christchurch earthquake) on national income. In particular, how the new spending in one sector has a multiplied effect as the spending injection increases income leading to further spending in other sectors of the economy.
  • Spending multiplier - for example, to calculate the impact on aggregate spending of a decision by the NZ government to cut spending by $2 billion. When the marginal propensity to consume is 0.8. the answer is $10 billion (if tax and imports are assumed to be zero).
  • In addition, students who have studied microeconomics may choose to use models they have studied there to illustrate the impact of internal and external influences on the governments macro objectives:
    • Labour market model – for example, to show the impact of the so-called “Brain Drain” on NZ labour markets and thus impact on the goal of full employment.
    • Foreign exchange model – for example, to illustrate the impact of a tight monetary policy causing an appreciation of NZ exchange rate and the consequent effect of this on exports and imports to support discussions on the goals like international trade balance, economic growth, or inflation.

Note: Some of these illustrations will involve showing complex concepts. For example, illustrating the impact of the Reserve Bank of New Zealand governor to raise the Official Cash Rate (OCR) which has the impact of shifting the AD curve left and AS right resulting in disinflation but having an indeterminate impact on economic growth and employment.

• Provide detailed explanations ¹ of:
  • macroeconomic influences on the New Zealand economy. Note: Detailed explanations of a macroeconomic influence should be supported by evidence from the economic model that is used to illustrate its impact.
• Compares and contrasts:
  • the effectiveness of one government policy in achieving different macroeconomic goals. For example, comparing the effectiveness of monetary policy in achieving economic growth and price stability
  • the effectiveness of different government policies in achieving one macroeconomic goal. For example, comparing supply side and fiscal policies in achieving long term economic growth
  • the impacts of one macroeconomic influence on different macroeconomic goals. For example, the long run impact of an improved international credit rating on the current account and employment
  • the impacts of different macroeconomic influences on one macroeconomic goal. For example, a free trade agreement and increased education spending (that results in a more productive local workforce) on economic growth.

Note: Evidence from the relevant economic model(s) will need to be integrated into compare and contrast explanations related to either impact macroeconomic influences on NZ’s macroeconomic goal(s) or the effectiveness of government policies in achieving NZ’s macroeconomic goal(s).

For example, when explaining in detail why monetary policy is more effective at achieving price stability than economic growth, integrating would require reference to the fact that an OCR change shifts AS + AD to cause a predictable change in the price level (that is, an OCR increase shifts AS right and AD left – both of which decrease the price level) but these AS + AD shifts will result in an indeterminate impact on economic growth (that is, an OCR increase shifts AS right, increasing economic growth and AD left causes economic growth to fall – so the actual change in economic growth will depend on the size of the relative AD + AS shifts).

1 – detailed explanations to economic questions typically have three parts. For example, What is the answer, Why is this the answer, How do you know?

For example  

How will the global economic crisis impact on NZ economic growth?

Answer

NZ economic growth will fall because overseas incomes fall in a recession so they will buy less NZ exports. A reduction in exports will reduce export receipts and aggregate demand will fall (from AD to AD¹) causing economic growth to fall (which is shown by the fall in real output from Y to Y¹) as local export producers cut back their planned production to match the lower level of planned spending.

Note: Hypothetical evidence has been added to show how an economic model could be used to support a detailed explanation.

Last updated May 10, 2013

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