Transcript Chapter 20 Introduction to macroeconomics - Home

ECON 1211
Lecturer: Dr B. Nowbutsing
Topic 1: Introduction to Macroeconomics and
National Income Accounting
1. Macroeconomics

the study of the economy as a whole

it deals with broad aggregates

but uses the same style of thinking
about economic issues as in
microeconomics.
20.1
2.

Some key issues in
macroeconomics
Inflation
–

Unemployment
–

the rate of change of the general price level
a measure of the number of people looking for
work, but who are without jobs
Output
–
real gross national product (GNP) measures
total income of an economy

it is closely related to the economy's total output
20.2
3.

More key issues in
macroeconomics
Economic growth
–

increases in real GNP, an indication of
the expansion of the economy’s total
output
Macroeconomic policy
–
a variety of policy measures used by
the government to affect the overall
performance of the economy
20.3
4. Inflation in the UK, 1950-99
30
25
15
10
5
19
90
19
70
0
19
50
% p.a.
20
Source: Economic Trends Annual Supplement, Labour Market Trends
20.4
5.
Inflation in selected European
countries
Germany
France
Belgium
EU
Finland
UK
Spain
Italy
Portugal
Greece
0
1
2
3
4
5
% change 1998 compared with 1997
20.5
Inflation in UK, USA and
Germany
% p.a.
6.
16
14
12
10
8
6
4
2
0
1960-73
1973-81
UK
USA
1981-90
1990-98
Germany
20.6
7.
Unemployment in the UK,
1950-99
14
12
8
6
4
2
19
90
19
70
0
19
50
% p.a.
10
Source: Economic Trends Annual Supplement, Labour Market Trends
20.7
8.
Unemployment
in selected European countries
Germany
France
Belgium
EU
Finland
UK
Spain
Italy
Portugal
Greece
0
5
10
15
20
% unemployment (ILO measure) 1998
20.8
9.
Unemployment
in UK, USA and Germany
10
% p.a.
8
6
4
2
0
1960-73
1973-81
UK
USA
1981-90
1990-98
Germany
20.9
10. Economic growth
in UK, USA and Germany
5
% p.a.
4
3
2
1
0
1960-73
1973-81
UK
USA
1981-90
1990-98
Germany
20.10
11. Inflation Rate in Mauritius
20.11
12. Employment Rate in Mauritius
20.12
13. Economic Growth Rate in
Mauritius
20.13
14. An Overview of Circular Flow

The circular flow shows how real resources
and financial payments flow between firms
and households

Households: supply factor services to firms,
receive factor incomes from firms, buy output
from firms

Firms: use factors to make output, rent factor
services from households, sell output to
households
20.14
15. The circular flow of income,
expenditure and output (closed economy)
C
Households
Firms
Y
20.15
16. National Income Accounting

Gross Domestic Product (GDP) – measures
the output made in the domestic economy,
regardless of who owns the production
inputs.

Transactions do not take place between a
single firm and a single household

Firms hire labour from households but buy
raw materials from other firms

To avoid double counting, we have to use
value added
20.16
16. National Income Accounting

Value added: firm’s output – firm’s input
goods used to make that output

Intermediate vs. final goods

Final goods are purchased by the ultimate
user.

Intermediate goods are partly-finished goods
that form inputs to a subsequent production
process that then uses them up
20.17
17. Investment and Saving

In the initial flow, there was no saving and
investment

A leakage from the circular flow is money no
longer recycled from households to firm
(saving)

An injection is money that flows to firms
without being cycled through households
(investment)
20.18
17. Investment and Saving

Three measures of GDP (income,
expenditure, output)

Y=C+S
Y: GDP; C: Consumption; S: Saving

Y=C+I
I: Investment
Thus, S = I
20.19
18. The circular flow of income,
expenditure and output
I
C
S
C+I
Households
Firms
Y
20.20
19. Government in the Circular
flow

Government raises revenue both through
direct taxes (Td) and indirect taxes (Te)

Government finance two kinds of
expenditures:
(1)
spending on goods and services, G, is
purchase by the government of physical `
goods and services including wages
(2)
Transfer payment, B, pensions and other
benefits
20.21
19. Government in the Circular
flow

Given B and Te, we must make a distinction between
Y and Yd such that Yd = Y+ B – Td,

Y=C+I+G

The above measures GDP at market prices

It we exclude indirect taxes, we get GDP at basic
prices, i.e.

Y = [C + I + G] – Te

S = (Y + B- Td) – C or Y = S + C + Td - B
20.22
19. Government in the Circular
flow
Given Y = [C + I + G] – Te and Y = S + C + Td - B
We get [C + I + G] – Te = Y = S + C + Td – B

This implies S + Td – Te = I + G + B
Left hand side is leakages from the circular flow
Right hand side is injections to the circular flow

The equation can be written as
S – I = G + B - Td – Te

Financial surplus in private sector can be offset by
a government deficit
20.23
19. Government in the circular
flow
I
C+I+G
C
S
G
Households
C + I + G - Te
Te
Government
Firms
B - Td
Y + B - Td
Y
20.24
20. Adding the foreign sector

To incorporate the foreign sector into the
circular flow

we must recognize that residents of a
country will buy imports from abroad

and that domestic firms will sell (export)
goods and services abroad.

Y = C + I + G + (X – Z) - Te
20.25
21. GDP and GNP

Gross domestic product (GDP)
–
measures the output produced by
factors of production located in the
domestic economy

Gross national product (GNP)

measures the total income earned by
domestic citizens
GNP = GDP + net income from abroad
–
20.26
22. Three measures of national
output

Expenditure
–
–

Income
–
–

the sum of expenditures in the economy
Y=C+I+G+X-Z
the sum of incomes paid for factor
services
wages, profits, etc.
Output
–
the sum of output (value added)
produced in the economy
20.27
23. National income accounting: a
summary
NYA
G
GNP
(and
GNI)
at
market
prices
I
X-Z
C
NYA
Deprec'n
Indirect
taxes
GDP
NNP
at
market at market National
prices prices income
Profits,
rents
Selfemployment
Wages
and
salaries
20.28
24. What GNP does and does not
measure




GNP is an aggregate measure (does not
consider distribution of income- Lorenz
Curve)
GNP is a combination of price and
quantity (inflation inflate GDP - distinguish
between real and nominal measurements)
GNP is not a comprehensive measure of
everything that contributes to economic
welfare
Population change should be considered
20.29