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

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

20.2

3.

More key issues in macroeconomics

Economic growth

increases in real GNP, an indication of the expansion of the economys total output a variety of policy measures used by the government to affect the overall performance of the economy

Macroeconomic policy

20.3

4. Inflation in the UK, 1950-99

30 25 20
% p.a.

15 10 5 0
19 50 19 70 19 90

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

% change 1998 compared with 1997

20.5

6.

Inflation in UK, USA and Germany

16 14 12 10 8 6 4 2 0 1960-73 1973-81 UK USA 1981-90 Germany 1990-98

% p.a.

20.6

7.
14 12 10
% p.a.

Unemployment in the UK, 1950-99

8 6 4 2 0
19 50 19 70 19 90

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

10

15

20

% unemployment (ILO measure) 1998

20.8

9.

Unemployment in UK, USA and Germany

10 8
% p.a.

6 4 2 0 1960-73 1973-81 UK USA 1981-90 Germany 1990-98

20.9

10. Economic growth in UK, USA and Germany

5 4
% p.a.

3 2 1 0 1960-73 1973-81 UK USA 1981-90 Germany 1990-98

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

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: firms output firms 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 S C C+I

Households

Firms

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: spending on goods and services, G, is purchase by the government of physical ` goods and services including wages

(1)

(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 S C G
Households Government

C+I+G Te

C + I + G - Te

Firms

B - Td
Y + B - Td

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

the sum of expenditures in the economy Y=C+I+G+X-Z the sum of incomes paid for factor services wages, profits, etc. the sum of output (value added) produced in the economy
20.27

Income

Output

23. National income accounting: a summary

NYA NYA

Deprec'n Indirect taxes

G
GNP (and GNI) at market prices I

X-Z
C

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