1. Macroeconomics

1. ECON 1211Lecturer: Dr B. Nowbutsing Topic 1: Introduction to Macroeconomics and National Income Accounting

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.

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

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

5. 4. Inflation in the UK, 1950-99 Source: Economic Trends Annual Supplement, Labour Market Trends

6. 5. Inflation in selected European countries

7. 6. Inflation in UK, USA and Germany

8. 7. Unemployment in the UK, 1950-99 Source: Economic Trends Annual Supplement, Labour Market Trends

9. 8. Unemployment in selected European countries

10. 9. Unemployment in UK, USA and Germany

11. 10. Economic growth in UK, USA and Germany

12. 11. Inflation Rate in Mauritius

13. 12. Employment Rate in Mauritius

14. 13. Economic Growth Rate in Mauritius

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

16. C Households Firms Y 15. The circular flow of income, expenditure and output (closed economy)

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

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

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)

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

21. I C + I C S Households Firms Y 18. The circular flow of income, expenditure and output

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

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

24. 19. Government in the Circular flow Given Y = [C + I + G] – Te andY = 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

25. I C + I + G C + I + G - Te C S G Te Households Government Firms B - Td Y + B - Td Y 19. Government in the circular flow

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

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

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

29. NYA NYA Deprec'n GDP at market prices G NNP at market prices Indirect taxes I National income Profits, rents X - Z Self- employment C Wages and salaries 23. National income accounting: a summary GNP (and GNI) at market prices

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