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ECON 1211Lecturer: Dr B. Nowbutsing
Topic 1: Introduction to Macroeconomics and National Income Accounting
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20.2
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.
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20.3
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
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20.4
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
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20.5
4. Inflation in the UK, 1950-99
0
5
10
15
20
25
30
% p
.a.
Source: Economic Trends Annual Supplement, Labour Market Trends
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20.6
5. Inflation in selected European countries
0 1 2 3 4 5
% change 1998 compared with 1997
Greece
Portugal
Italy
Spain
UK
Finland
EU
Belgium
France
Germany
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20.7
6. Inflation in UK, USA and Germany
0
2
4
6
8
10
12
14
16
% p
.a.
1960-73 1973-81 1981-90 1990-98
UK USA Germany
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20.8
7. Unemployment in the UK, 1950-99
0
2
4
6
8
10
12
14
% p
.a.
Source: Economic Trends Annual Supplement, Labour Market Trends
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20.9
8. Unemploymentin selected European countries
0 5 10 15 20
% unemployment (ILO measure) 1998
Greece
Portugal
Italy
Spain
UK
Finland
EU
Belgium
France
Germany
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20.10
9. Unemploymentin UK, USA and Germany
0
2
4
6
8
10
% p
.a.
1960-73 1973-81 1981-90 1990-98
UK USA Germany
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20.11
10. Economic growthin UK, USA and Germany
0
1
2
3
4
5
% p
.a.
1960-73 1973-81 1981-90 1990-98
UK USA Germany
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20.12
11. Inflation Rate in Mauritius
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20.13
12. Employment Rate in Mauritius
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20.14
13. Economic Growth Rate in Mauritius
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20.15
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
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20.16
15. The circular flow of income, expenditure and output (closed economy)
Households Firms
Y
C
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20.17
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
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20.18
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
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20.19
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)
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20.20
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
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20.21
18. The circular flow of income, expenditure and output
Y
Households Firms
C + I
I
CS
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20.22
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
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20.23
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
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20.24
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
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20.25
19. Government in the circular flow
Y
C + I + G
I
CS
Households FirmsGovernment
C + I + G - Te
Te
G
B - Td
Y + B - Td
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20.26
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
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20.27
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
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20.28
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
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20.29
23. National income accounting: a summary
GNP(andGNI)
atmarketprices
GDPat
marketprices
NYA
C
X - Z
I
NYA
G
NNPat market
prices
Deprec'n
Nationalincome
Indirect taxes
Wagesand
salaries
Self-employment
Profits,rents
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20.30
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