ECON 1211 Lecturer: Dr B. Nowbutsing Topic 1: Introduction to Macroeconomics and National Income Accounting

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Oct 28, 2013 (3 years and 9 months ago)

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ECON 1211

Lecturer: Dr B. Nowbutsing

Topic 1: Introduction to Macroeconomics
and National Income Accounting

20.
1

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.
2

2.

Some key issues in

macroeconomics


Inflation


the rate of change of the general price level


Unemployment


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.
3

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.
4

4.

Inflation in the UK, 1950
-
99

Source: Economic Trends Annual Supplement, Labour Market Trends

20.
5

5.

Inflation in selected European

countries

20.
6

6.

Inflation in UK, USA and

Germany

20.
7

7.

Unemployment in the UK,

1950
-
99

Source: Economic Trends Annual Supplement, Labour Market Trends

20.
8

8.

Unemployment


in selected European countries

20.
9

9.

Unemployment


in UK, USA and Germany

20.
10

10.

Economic growth


in UK, USA and Germany

20.
11

11.

Inflation Rate in Mauritius


20.
12

12.

Employment Rate in Mauritius


20.
13

13.

Economic Growth Rate in
Mauritius


20.
14

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.
15

15.

The circular flow of income,
expenditure and output
(closed economy)

Households

Firms

Y

C

20.
16

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.
17

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.
18

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.
19

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.
20

18.

The circular flow of

income,
expenditure and output

Y

Households

Firms

C + I

I

C

S

20.
21

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.
22

19.

Government in the Circular
flow


Given B and T
e
, we must make a distinction between
Y and Y
d

such that Y
d

= Y+ B


T
d,


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]


T
e


S = (Y + B
-

T
d
)


C or Y = S + C + T
d

-

B


20.
23

19.

Government in the Circular
flow

Given Y = [C + I + G]


T
e

and

Y = S + C + T
d

-

B

We get [C + I + G]


T
e
= Y = S + C + T
d



B



This implies S + T
d


T
e

= 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
-

T
d


T
e



Financial surplus in private sector can be offset by
a government deficit



20.
24

19.

Government in the circular

flow

Y

C + I + G

I

C

S

Households

Firms

Government

C + I + G
-

T
e

T
e

G

B
-

T
d

Y + B
-

T
d

20.
25

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)
-

T
e


20.
26

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.
27

22.

Three measures of national

output


Expenditure


the sum of expenditures in the economy


Y = C + I + G + X
-

Z


Income


the sum of incomes paid for factor
services


wages, profits, etc.


Output


the sum of output (value added)
produced in the economy

20.
28

23.

National income accounting: a
summary

GNP

(and

GNI)

at

market

prices

GDP

at

market

prices

NYA

C

X
-

Z

I

NYA

G

NNP

at market

prices

Deprec'n

National

income

Indirect

taxes

Wages

and

salaries

Self
-

employment

Profits,

rents

20.
29

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