Macroeconomics Introduction Frederick University 2014.
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Transcript of Macroeconomics Introduction Frederick University 2014.
![Page 1: Macroeconomics Introduction Frederick University 2014.](https://reader035.fdocuments.us/reader035/viewer/2022062518/56649d705503460f94a524ba/html5/thumbnails/1.jpg)
MacroeconomicsIntroduction
Frederick University
2014
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Economic Agents
households firms
government
L, N, K
Final goods and services
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Factors Generating Economic Problems
Scarcity of resources Technological changes Changes in tastes and preferences
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Main Economic Questions
Generators
Scarcity of resources
Technological changes
Changes in tastes and preferences
Questions
What (and how much)
How For whom
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Main Economic problems
Questions What and how
much
How
For Whom
Problems Efficiency in
allocation Efficiency in
motivation Efficiency in
distribution
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Economics
Economics is the study of how economic agents make decisions what to produce, how to produce, and for whom to produce
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Microeconomics vs. Macroeconomics Microeconomics – studies how economic
agents make decisions what, how and for whom to produce from the point of view of individual households and firms
Macroeconomics - studies how economic agents make decisions what, how and for whom to produce from the perspective of the impact of these decisions on the national economy as a whole.
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Major Macroeconomic Issues
Output Employment and Unemployment Price Level
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Macroeconomic objectives
Issues Output
Employment and Unemployment
Price level
Objectives High level and rapid
growth of output High level of
employment and low level of involuntary unemployment
Price level stability
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Production Possibilities Frontier
wine movies choices
20 0 A
16 6 B
12 10 C
8 13 D
4 15 E
0 16 F
A
W
B
C
F
M
Production Possibilities Curve
20
0
16
6
12
10
16
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Physical and Institutional PPF
w
M
Physical PPF
Institutional PPF
Physical PPF – indicates the potential of theeconomy to produce, constrained by thephysical availability of resources
Institutional PPF – indicates the potential of the economy to produce,constrained by the physical availability of resources and by the rulesand traditions followed by the decision makers
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Institutional PPF and Potential Output Potential Output – the maximum sustainable
level of output that the economy can produce, given the productive capacity, the economy’s technological efficiency, and the rules and traditions, followed in the economy
When actual output exceeds potential output, price inflation tends to rise
When actual output falls below the potential, unemployment tend to increase
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The Rate of Employment and The Rate of Unemployment Employment Rate – reflects the fraction of
working population over 16 and below 64 years
Unemployment rate – reflects the percentage of unemployed in the labor force
Labor force = employed + unemployed Unemployment rate = [unemployed :
(employed + unemployed)] x 100% Natural rate of Unemployment – the rate of
unemployment, determined by the institutional PPF and potential output.
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Price Stability and the Rate of Inflation Price stability – the price level is
unchanged or rises very slowly The Consumer Price Index (CPI) -
measures the average price of goods and services bought by consumers
Rate of Inflation – the percentage change in the overall price level from one year to the next
Inflation 2012 = [(CPI20012 – CPI2011) : CPI2011] x 100%
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Aggregate Demand AD – the quantity of GDP, which the economic agents are
planning to buy at every price level, ceteris paribus
Price level
output
AD AD depends on:
The willingness of households to buy output
The willingness of firms to buy output
Government fiscal and monetary policies
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Aggregate Supply Aggregate supply (AS) - the total quantity of goods and services that
the firms in the country are willing to produce and sell at every price level, ceteris paribus.
Price level
Output
AS
AS depends on:
Physical PPF – resources and technology
Potential output determined by institutions,shaping costs, efficient use of resources
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Macroeconomic Equilibrium
P AS and AD determine:
equilibrium output the level of
employment and unemployment
the price level and the rate of inflation
the balance of payments
Output
AD AS
E
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FIRMSHOUSEHOLDS
Expenditures on final goods and services
Primary Income
Production factors
Final goods and services
The Circular Flow
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GDP Gross Domestic Product – value of final
goods and services produced in the economy within a year
Final goods and services – produced during the current period and not used in the production of other goods and services
Intermediate goods The double counting problem
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Value Added
Stages of the production process of 1/2 kilo of bread:
1. Wheat from the farmer – € 0.15
2. Flour from the miller – €0.43
3. Bread from the backer – €0.84
Value added
1. Wheat – €0.152. Flour – €0.283. Bread – €0.414. Total Value added =
= 0.15 + 0.28 + 0.41 = 0.84
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Expenditure Approach
Economic Agents
households firms government foreigners
Expenditures
C + I + G + X - M
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Expenditure approach
GDP = C + I + G + X – M = АЕ
Aggregate Expenditures
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Income approach
GDP = ∑ primary income = Wages and salaries + proprietors’ income + interests + rents + dividends + retained earnings + depreciation
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Expenditure approach vs. Income approach
АЕ- Indirect taxes- + subsidies
= Primary income
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Three approaches to GDP calculation
The value added approach The expenditure approach The income approach
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GDP vs. GNP
GDP – created on the national territory
GNP – created by the citizens of the country
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Net Domestic Product
GDP (АЕ) – depreciation allowances = NDP
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Domestic Income, Personal Income and Disposable IncomeGDP (income approach) - Depreciation = NDP (income approach) = Domestic
income
Domestic income- Retained earnings- Corporate taxes- Social security+ Transfer payments to the households_________________________________= Personal income- households’ income taxes
= Disposable income
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GDP Shortcomings underground activities income distribution leisure time demerit activities market prices public goods production at factor prices quantity vs. quality net exports might not contribute to the
growth of welfare
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Real vs. Nominal GDP Nominal GDP – GDP at current prices Real GDP – GDP at constant prices
(base year prices – chosen year) Index – the change in the value of an
indicator compared to its previous level, taken as a base (= 100)
GDP deflator =(Nominal GDP : Real GDP) х 100