Post on 02-Jun-2018
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The Level of Overall
Economic Activity
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What do you know?In groups write down what you know
about macroeconomics
Think about these things (but dont
limit your thoughts to these)
What is the difference/link
between micro and macro
Who are the main players in the
macro economy?
What does a good economy look
like?
What is happening in the world
economy at the moment?
Even if you know words but dont
know their meaning write them down!
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Learning ObjectivesUnderstand the five main
macroeconomic objectives (goals)
Understand, describe and illustrate
the circular flow of income
Understand the different measures
of national income
Calculate national income
Explain the meaning and
significance of green GDP
Evaluate the uses of national
statistics
Explain and illustrate the business
cycle
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What is Macro economics?Before we looked at micro economics
We looked at what happened within the
firm and within the marketNow add all of those markets togetherand we get the macro economy
We looked at allocation of resources in
a marketMacroeconomics is concerned with theallocation of a nations resources
There are five main variablesEconomic growth
Employment
Price stability
External stability
Income distribution
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Macro objectivesThere are five objectives that most
economies have
A steady increase of national
output (growth)
A low level of unemployment
A low and stable rate of inflation
A favourable balance ofpayments (Trade - Exports minus
Imports)
An equitable (fair) distribution of
income
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Macroeconomic policies
Government actions designed to affect the
performance of the economy as a whole
Types of macroeconomic policies
Monetary policydetermination of the
nations money supply
Fiscal policydecisions determine the
governments budget, including the amountand composition of government expenditures
and government revenues
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Macroeconomic policies
Structural policygovernment policies
aimed at changing the underlying
structure, or institutions, of the nations
economy
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The circular flow gameTo understand how an economy works weneed to understand the flows
To do this we will use a really simple model
There are four households (families) whohave been shipwrecked on a desert island
Divide into 4 groups
The supply of money in the economy is 5and we assume that all the money will be
used to buy good and servicesHousehold A spends 5 and received fromhousehold B goods and services in exchange.
Household B then spends 5 on goods soldby household C and the process is repeateduntil all households have participated.
Keep count of how much your householdspends
Keep count of how much you earn
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The circular flow game
If these 4 families
are the entireeconomy
What is the value ofnational output = ?
20What is nationalincome = ?
20
What is nationalexpenditure = ?
20
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The circular flow game -summary
In a simplified modelGDP = National Output =
National Income = NationalExpenditure
Not only is this true in asimplified model it is alsotrue (with a few statisticaladjustments) for any
economyIn a more sophisticatedeconomy households donot trade with each other
and we need to add firms
GDP =
National
Output =
nationalincome =
national
expenditure
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Check your understanding National Income, National Output
and National Expenditure should
always be equal. Why is this? If a newspaper headline says UK
National Income increased lastyear by 2%, what does this meanin terms of
output and expenditure? Changes in flow?
Same amount of growth innational output and national
expenditure Flow has increased
More flowing in than out
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What circular
flows do we
have in this 2
sector model?
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Leakages and Injections
This model is very simplified
What is it not taking intoconsideration?
Do people spend all of theirincome?
No, they save some in thebank or other financialinstitutions
This is known as a leakagefrom the circular flow
If households dont buy all theoutput that is produced by thefirms will have unsold stock
They will reduce their output
They will use less factors ofproduction and pay less income
The amount of income in the
economy will fall
Saving: foregoing current
consumption to allow for
consumption in the future
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Leakages and InjectionsThe good thing about savingsis that firms will have access to
them by borrowing money frombanks
They can use the money toincrease their stock of capitaland expand their output
This is known as investmentIt is an injection into thecircular flow of income
Investment allows the amount
of income circulating in theeconomy to rise
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Leakages and InjectionsWhy is this model still too simple?
An economy is not closed
Households can buy goods andservices from other countries
Would this be an injection or aleakage?
Imports are a leakagethis isincome that is being spent and not
being returned to firms
People buy the countries exportsof goods and services
Are exports leakages or injectionsExports are an Injection becausethey represent a source of incomenot coming directly from the
households
L k d I j ti
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Leakages and InjectionsWhy is this model still too simple?
There are more than two sectors
We now need to introduce the government sector
What injection and leakage can be added to this diagram due to theintroduction of the government sector?
Leakages and Injections
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Leakages and InjectionsSome of the income earned by the households must be paid to thegovernment in the form of taxes
Taxes are a leakage
Governments spend money in the economy on schools, roads, campaigns,hospitals etc
Government spending is an injection
Dont assume that governmentspending = revenue from taxes
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Leakages and InjectionsYou will see later that governments can spend more than they earn todeliberately influence the level of leakages and injections to affect the level ofnational income
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How is national incomemeasured?There are three ways (which we saw beforewhen we played the desert island game) ofmeasuring income
Can you remember?
Outputthe value of goods and servicesproduced (less the costs of inputs)
Incomethe value of all incomes earned in
the economyExpenditurethe value of all spending in theeconomy
Spending by households known asconsumption (C)
Spending by firms known as investment (I)Spending by government (G)
Spending by foreigners on exports minusspending on imports or net exports (X-M)
There is an identity that you will need to
learn GDP = C + I + G + (X-M)
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Different measures ofincome
GDPthe total of alleconomic activity in a
country regardless of
who owns the
productive assets
Gross National
Product (GNP) or
Gross National
Income (GNI)the
total income that is
earned by a countrys
factors of production
regardless of where
the assets arelocated
GNI GDP income
earned
from
assets
abroad
income paid to
foreign assets
operating
domestically
= + -
Over time capital
gets used upits
value depreciatesGDP does not take
this into
consideration. NNI
does. NNI = GNI
minus depreciation
Green GDPGDP
minus environmental
costs
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Real GDP or nominal GDPTo make a comparison of GDP year onyear you need to take into consideration
the rise in pricesYou are measuring by the total value ofgoods and services
The goods and services may not havechanged
Inflation may mean that the prices ofthe same goods and services have goneup
We use a GDP deflatorto do this
GDP x 100/(100 + inflation rate) = realGDP
If the inflation rate was 4%
Real GDP = GDP x 100/104
Real GDPGDP
which has been
adjusted for inflation
Nominal GDP
GDP which has not
been adjusted for
inflation
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GDP per capitaTo make a judgement about theprogress of a country in comparison with
other countries in terms of raising livingstandards the GDP per capita figure ismuch more appropriate
GDP per capita
GDP divided by the
size of the population
Li it ti f th d t
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Limitations of the dataInaccuraciesfigures tend to become more accurate aftertime as they are revised
Unrecordedor under-recorded economic activity (informal
markets)DIY in developed countries
Care for elderly or children
Subsistence farming in developing countries
Illegal activities (alien workers, drug trafficking etc)
Work done for cash (and no tax is paid)Countries with higher tax burdens tend to have a largerhidden economy
External costs
GDP does not take into account resource depletion or
negative externalitiesQuality of life concerns
GDP may grow because people are working longer hours
Composition of output
Output could be defence that does not benefit consumers
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TheBusinessCycle
The businesscyclefluctuations ineconomicactivity
measured bychanges in realGDP
Fluctuationsin practice arehighly irregular
Recovery: economic expansion largely driven by increase in aggregate
demand as households and consumers are encouraged to spend more.
Firms increase their output in response to the increase in demand. Newly
employed workers spend their income on goods and services
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TheBusinessCycle
Boom: increased demand for goods and services pushes up average prices
(inflation). The rate of growth of GDP will fall as the economy nears its
potential output. Policy makers may try to slow growth (to reduce inflation)
causing a fall in total demand and recessioncould begin.
Recession: defined as
two consecutive
quarters of negative
GDP growth. Falling
aggregate demand will
lead firms to lay offworkers so
unemployment rises.
This means less
spending leading to
lower rates of inflation
or deflation
Trough: at some point the
contraction will come to an
end. Aggregate demand will
pick up and enter the
recovery phase
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Negative output gap (A):
the economy is producing
below its trend and
unemployment is likely to be
a problem
Long term trendand output gaps
Positive output gap (B):
the economy is producing
above its trend and inflation
is likely to be a problem
Economies fluctuate but
tend to have positive longterm growth trends