7. Aggregate Demand and Supply and Macroeconomic Problems

1. 7. Aggregate Demand and Supply and Macroeconomic Problems

2. Macroeconomic Objectives • Distinction between microeconomics and macroeconomics • The major macroeconomic issues • economic growth • unemployment • inflation • balance of payments and exchange rates • balance of payments deficits and surpluses • exchange rate movements

3. Economic growth (average % per annum), Unemployment (average %), Inflation (average % per annum)

4. The Circular Flow of Income • The inner flow

5. Consumption of domestically produced goods and services (Cd) Factor payments The circular flow of income Firms Households

6. The Circular Flow of Income • Withdrawals • net saving • net taxes • import expenditure • Injections • investment • government expenditure • export expenditure

7. Export expenditure (X) Investment (I) Government expenditure (G) BANKS, etc ABROAD GOV. Import expenditure (M) Net taxes (T) Net saving (S) The circular flow of income INJECTIONS Consumption of domestically produced goods and services (Cd) Factor payments WITHDRAWALS

8. The Circular Flow of Income • The relationship between injections and withdrawals • the links between them

9. Export expenditure (X) Investment (I) Government expenditure (G) BANKS, etc ABROAD GOV. Import expenditure (M) Net taxes (T) Net saving (S) The circular flow of income INJECTIONS Consumption of domestically produced goods and services (Cd) Factor payments WITHDRAWALS

10. The Circular Flow of Income • The relationship between injections and withdrawals • the links between them • planned injections may not equal planned withdrawals

11. The Circular Flow of Income • The relationship between injections and withdrawals • the links between them • planned injections may not equal planned withdrawals • Equilibrium in the circular flow

12. Export expenditure (X) Investment (I) Government expenditure (G) BANKS, etc ABROAD GOV. Import expenditure (M) Net taxes (T) Net saving (S) The circular flow of income INJECTIONS Consumption of domestically produced goods and services (Cd) Factor payments WITHDRAWALS

13. The Circular Flow of Income • The relationship between injections and withdrawals • the links between them • planned injections may not equal planned withdrawals • Equilibrium in the circular flow • The circular flow and the four macroeconomic objectives

14. Export expenditure (X) Investment (I) Government expenditure (G) BANKS, etc ABROAD GOV. Import expenditure (M) Net taxes (T) Net saving (S) The circular flow of income INJECTIONS Consumption of domestically produced goods and services (Cd) Factor payments WITHDRAWALS

15. Measuring national income • GDP: the measure of national income • Methods of measuring GDP • the product approach • the income approach • the expenditure approach • The product approach • measuring GVA

16. UK GVA product-based measure: 1998 1.3 3.9 19.7 5.3 12.0 3.2 8.4 2.4 21.3 5.4 11.9 5.2 100.0 Agriculture, forestry and fishing £9 656 m Mining, energy and water supply £29 485 m Manufacturing £147 306 m Construction £39 262 m Wholesale and retail trade; repairs £89 392 m Hotels and restaurants £23 678m Transport and communication £63 340 m Banking, finance, insurance, etc. £17 737 m Letting of property £159 240 m Public administration and defence £40 495 m Education, health and social work £89 041 m Other services £38 912 m Gross value added (GVA) at basic prices £747 544 m Percentage of GVA

17. Measuring national income • GDP: the measure of national income • Methods of measuring GDP • the product approach • the income approach • the expenditure approach • The product approach • measuring GVA • The income approach

18. UK GVA by category of income: 1998 62.0 29.9 5.8 2.3 100.0 Compensation of employees (wages and salaries) £463 398 m Operating surplus (gross profit, rent and interest of firms government and other institutions) £223 212 m Mixed incomes £43 379 m Tax less subsidies on production (other than those on products) plus statistical discrepancy £17 555 m Gross value added (GVA) at basic prices £747 544m Percentage of GVA

19. Measuring national income • GDP: the measure of national income • Methods of measuring GDP • the product approach • the income approach • the expenditure approach • The product approach • measuring GVA • The income approach • from GVA to GDP

20. UK GDP: 1998 Gross value added (GVA) at basic prices £747 544m

21. UK GDP: 1998 Gross value added (GVA) at basic prices £747 544m plus Taxes on products £103 634m

22. UK GDP: 1998 Gross value added (GVA) at basic prices £747 544m plus Taxes on products £103 634m less Subsidies on products £7 453m

23. UK GDP: 1998 Gross value added (GVA) at basic prices £747 544m plus Taxes on products £103 634m less Subsidies on products £7 453m GDP (at market prices) £843 725m

24. Measuring national income • GDP: the measure of national income • Methods of measuring GDP • the product approach • the income approach • the expenditure approach • The product approach • measuring GVA • The income approach • The expenditure approach

25. UK GDP at market prices by category of expenditure: 1998

26. UK GDP at market prices by category of expenditure: 1998

27. UK GDP at market prices by category of expenditure: 1998

28. UK GDP at market prices by category of expenditure: 1998

29. UK GDP at market prices by category of expenditure: 1998

30. UK GDP at market prices by category of expenditure: 1998

31. Measuring national income • GDP: the measure of national income • The product approach • The income approach • The expenditure approach • From GDP to net national income (NNY)

32. UK GDP, GNY and NNY at market prices: 1998

33. UK GDP, GNY and NNY at market prices: 1998

34. Economic Growth andthe Business Cycle • Growth in actual and potential output • Economic growth and the business cycle • fluctuations in actual growth

35. The business cycle Potential output Actual output National output O Time

36. Economic Growth andthe Business Cycle • Growth in actual and potential output • Economic growth and the business cycle • fluctuations in actual growth • the phases of the business cycle

37. The business cycle 3 4 2 1 Potential output National output Actual output 3 4 2 1 O Time

38. Economic Growth andthe Business Cycle • Growth in actual and potential output • Economic growth and the business cycle • fluctuations in actual growth • the phases of the business cycle • trend growth

39. The business cycle Trend output Potential output National output Actual output O Time

40. Economic Growth andthe Business Cycle • Economic growth and the business cycle • fluctuations in actual growth • the phases of the business cycle • trend growth • the business cycle in practice

41. Economic Growth andthe Business Cycle • Economic growth and the business cycle • fluctuations in actual growth • the phases of the business cycle • trend growth • the business cycle in practice • the irregularity of the cycle

42. Economic Growth andthe Business Cycle • Economic growth and the business cycle • fluctuations in actual growth • the phases of the business cycle • trend growth • the business cycle in practice • the irregularity of the cycle • the length of the phases

43. Economic Growth andthe Business Cycle • Economic growth and the business cycle • fluctuations in actual growth • the phases of the business cycle • trend growth • the business cycle in practice • the irregularity of the cycle • the length of the phases • the magnitude of the phases

44. Economic Growth andthe Business Cycle • Causes of actual growth • aggregate demand • aggregate demand relative to potential output • Actual growth in practice • experience since 1970

45. Growth rates in selected industrial countries UK Annual growth rate (%)

46. Growth rates in selected industrial countries UK Annual growth rate (%)

47. Growth rates in selected industrial countries UK France Annual growth rate (%)

48. Growth rates in selected industrial countries UK France Annual growth rate (%)

49. Growth rates in selected industrial countries Germany UK France Annual growth rate (%)

50. Growth rates in selected industrial countries Germany UK France Annual growth rate (%)