gsb728 lecture note topic 4a
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Economics for Management
GSB728
Topic 7:
National Income and Accounting
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Note: This lecture note was prepared based on the teaching material provided
by the publisher of the textbook Principles of Economics.
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Learning Objectives1. Macroeconomic issues – What are the major issues in
the economy as a whole?
2. The circular flow of income – Why does money go round and round from firms to consumers and back again?
3. Economic growth and the business cycle - Is a country’s economic growth likely to be constant over time?
4. Unemployment – If people want to consume more goods, why are so many people out of work?
5. Inflation – The tendency for prices to rise. 3
Macroeconomic Issues• Microeconomics focuses on individual markets
while macroeconomics examine the economy as a whole.
• The major macroeconomic issues:
– Gross Domestic Product (GDP):• Nominal GDP: Value of the flow of final goods and
services produced over a 12 months period at current prices.
• Real GDP: Nominal GDP adjusted for inflation.
– Economic growth:• Rate of economic growth: Percentage increase in real
GDP over a 12 months period.4
Macroeconomic Issues (contd.)
– Unemployment: ‘People of working age who are without work, but want to work and are available for work at current wage rates’.
• Unemployment rate: Number of unemployed people as a percentage of the labour force.
– Inflation: Persistent rise in the general level of prices of all goods and services.
• Rate of inflation: Annual percentage increase in the price level.
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Macroeconomic Issues (contd.)
– Balance of payments: Record of all transactions between a country and the rest of the world.
• Current account: Record of a country’s imports and exports of goods and services, plus direct flows of income or payments.
• Capital account: Record of transactions between domestic and foreign residents that involve the acquisition of either an asset or liability.
• Financial account: Part of the capital account, which includes the foreign investment.
CAB + KAB = 0
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– Macroeconomic objectives:• High and sustainable economic growth.
• Low unemployment.
• Low inflation.
• Satisfactory balance of payments.
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Macroeconomic Issues (contd.)
Circular Flow of Income– The four macroeconomic objectives are linked.– Aggregate demand can be expressed in the form
of this equation:
AD = C + I + G + X – M
Where AD is aggregate demand; C is consumption of goods and
services; I is investment expenditure; G is government expenditure; X
is exports, other countries’ expenditure of our domestically-produced
goods and services; and M is imports, our expenditure on other
countries’ goods and services.
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• The inner flow, withdrawals and injections– The inner flow is presented in the next slide.
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Circular Flow of Income (contd.)
Firms
Households
Inner Flow of Income
Factor Payments
Consumption of domestically
produced goods and services (Cd)
10Source: Sloman et al. (2014).
– Withdrawals (W):• Net saving (S)
• Net taxes (T)
• Import expenditure (M)
W = S + T + M
– Injections (J):• Investment (I)
• Government expenditure (G)
• Export expenditure (X)
J = I + G + X11
Circular Flow of Income (contd.)
Factor Payments
S T M
Withdrawals
Injections
I G X
BANKS GOVT ABROADCd
Inner Flow of Income, Withdrawals and Injections
12Source: Sloman et al. (2014).
– The circular flow and the four macroeconomic objectives:
• When aggregate demand rises: Economic growth occurs.
Unemployment rate falls.
Inflation tends to rise.
Imports tend to rise, exports tend to fall.
– Equilibrium in the circular flow is achieved when injections equalise withdrawals.
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Circular Flow of Income (contd.)
• The distinction between actual and potential growth:
• Actual growth: Percentage annual increase in national output actually produced.
• Potential growth: Percentage annual increase in the capacity of the economy to produce. The rate of growth of potential output.
• Potential output: Output that could be produced in the economy if there was a full employment of resources (including labour).
Economic Growth and the Business Cycle
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• Economic growth and the business cycle:– Business cycle or trade cycle: Periodic fluctuations of
national output around its long-term trend.– There are fluctuations in actual growth, characterised
by the phases of the business cycle:• Upturn: A stagnant economy begins to recover and
growth in actual output.
• Expansion: Rapid economic growth (the economy is booming).
• Peaking Out: Growth slows down or even ceases.
• Slowdown, Recession or Slump: No growth or decline in output.
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Economic Growth and the Business Cycle (contd.)
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Nati
onal
out
put
Time
The Business CyclePotentialoutput
Actualoutput
Source: Sloman et al. (2014). 16
0
Nati
onal
out
put
Time
Potential output
Actualoutput
1
2
3
4
Upturn
BoomPeak
Recession
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3
4
The Business Cycle (contd.)
Source: Sloman et al. (2014). 17
– Long-term output trend.
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Economic Growth and the Business Cycle (contd.)
0
Nati
onal
out
put
Time
Potential output
Actualoutput
Trend output
Source: Sloman et al. (2014).
The Business Cycle (contd.)
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– Business cycle in practice – Irregularity of the cycle:• Length of the phases.
• Magnitude of the phases.
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Economic Growth and the Business Cycle (contd.)
Annu
al g
row
th ra
te (%
)
-1
0
1
2
3
4
5
6
1985 2006
Economic Growth in Australia, 1985-2006
Source: Sloman et al. (2014).
• Causes of fluctuations in actual growth:
– Short-run:• Growth in aggregate demand: It will create shortages
and will stimulate firms to increase output.
– Long-run:• Growth in aggregate demand.
• Growth in potential output.
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Economic Growth and the Business Cycle (contd.)
• Policies to achieve growth:– Demand-side:
• Create sufficient aggregate demand.
– Supply-side:• Increasing potential output:
– Research and development.– Innovation.– Training.
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Economic Growth and the Business Cycle (contd.)
• Benefits of economic growth:
• Increased consumption.
• Easier to redistribute income to the poor.
• Can afford to care more for the environment.
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Economic Growth and the Business Cycle (contd.)
• Costs of economic growth:
• Growth may simply generate extra demands.
• Social effects.
• Environmental costs.
• Non-renewable resources.
• Effects on income distribution.
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Economic Growth and the Business Cycle (contd.)
Unemployment
• The meaning of ‘unemployment’:• Number of unemployed.• Labour force.• Unemployment rate.
• The costs of unemployment:• To the person unemployed.• To family and friends of the unemployed.• To the economy.
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Inflation• The costs of inflation:
– Menu costs: Associated with having to adjust price lists or labels.
– Redistribution: Those on fixed incomes and in a weak bargaining position will be affected.
– Uncertainty and lack of investment.
– Worsen the balance of payments: Exports will become less competitive in world markets.
– Resources used to cope with inflation: Accountants and other financial experts may have to be employed by companies to help them to cope with the uncertainties caused by inflation. 27
• The causes of inflation:
– Demand-pull inflation: Caused by persistent rises in aggregated demand.
– Cost-push inflation: Caused by persistent rises in the costs of production (independent of demand).
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Inflation (contd.)
References
Morales, L. E., Simons, P. and Valle de Souza, S. (2014). GSB728: Economics for Management [Topic Notes]. Armidale, Australia: University of New England, Graduate School of Business.
Sloman, J., Norris, K and Garratt, D. (2014). Principles of Economics (4th ed.). French Forest, Australia: Pearson.
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