Introduction Modules 11 and 12

1. Introduction Modules 11 and 12

2. Module 11 – Macroeconomics Overview • This module is a first introduction to macroeconomics • Important topics are • Potential output • Production possibility curve • Actual output • Economic circulation • Demand for the output

3. WHAT DO ECONOMISTS STUDY? • Macroeconomic issues • growth • unemployment • inflation • balance of payments problems • cyclical fluctuations

4. Potential Output • Potential output is linked to the economy's supply side or productive capacity • What can be produced, given the limited supply of the factors of production and the technological state of the economy • Potential output will grow over time because the supply of factors of production increase and above all due to technological growth

5. Potential and Actual Output in Norway

6. Actual output • Actual output is known as Gross National Product (GNP), and there are several ways to measuring the overall level of economic activity • The production approach (GNP) • The spending (expenditure) approach (GNE) • The income approach (GNI)

7. The circular flow of goods and incomes

8. The circular flow of goods and incomes Goods and services

9. The circular flow of goods and incomes Goods and services £ Consumer expenditure

10. The circular flow of goods and incomes Goods and services £ Consumer expenditure Services of factors of production (labour, etc)

11. The circular flow of goods and incomes Goods and services £ Consumer expenditure Wages, rent dividends, etc. £ Services of factors of production (labour, etc)

12. The circular flow of goods and incomes Goods and services £ Consumer expenditure GOODS MARKETS FACTOR MARKETS Wages, rent dividends, etc. £ Services of factors of production (labour, etc)

13. Measuring the activity • GNP (or more correctly GDP) as a production approach is the value of all final goods produced in the economy • Demand for what is produced can conveniently be divided into various groups • Private consumption (C) • Private investment (I) • Government (G) • The foreign sector (X – Z) • The factors of production receive income for their efforts • GNP = GNE = GNI = Y • Y = C + I + G + X – Z

14. Module 12 – Potential Output • We have already established that potential output is closely related to the productive capacity of the economy • In macroeconomics, it is frequently expressed by the production possibilitu curve (PPC) • PPC shows what can be produced using all available resources as efficiently as possible

15. Units of food Units of clothing (millions) (millions) 8m 0.0 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m A production possibility curve Units of food (millions) Units of clothing (millions)

16. A production possibility curve a Units of food Units of clothing (millions) (millions) a 8m 0.0 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m Units of food (millions) Units of clothing (millions)

17. A production possibility curve b Units of food Units of clothing (millions) (millions) 8m 0.0 b 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m Units of food (millions) Units of clothing (millions)

18. A production possibility curve c Units of food Units of clothing (millions) (millions) 8m 0.0 7m 2.2m c 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m Units of food (millions) Units of clothing (millions)

19. A production possibility curve Units of food Units of clothing (millions) (millions) 8m 0.0 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m Units of food (millions) Units of clothing (millions)

20. 1 1 Increasing opportunity costs x y Units of food (millions) Units of clothing (millions)

21. 1 1 2 1 Increasing opportunity costs x y Units of food (millions) z Units of clothing (millions)

22. Making a fuller use of resources x Production inside the production possibility curve y v Food O Clothing

23. Growth in potential output Now Food O Clothing

24. Growth in potential output 5 years’ time Food Now O Clothing

25. Unemployment • The textbook does not give any thorough discussion on unemployment • It is sometimes helpful to separate unemployment into two parts • Equilibrium (natural) unemployment • Disequilibrium (involuntary) unemployment • The labour market is (almost) like any other market – supply and demand

26. CAUSES OF UNEMPLOYMENT • Disequilibrium unemployment • real-wage (classical) unemployment • demand-deficient (cyclical) unemployment • unemployment arising from a growth in the labour supply

27. CAUSES OF UNEMPLOYMENT • Equilibrium unemployment • frictional (search) unemployment • structural unemployment • changing pattern of demand • regional unemployment • technological unemployment • seasonal unemployment

28. Unemployment rates in selected industrial countries UK

29. Unemployment rates in selected industrial countries UK

30. Unemployment rates in selected industrial countries UK France

31. Unemployment rates in selected industrial countries UK France

32. Unemployment rates in selected industrial countries Germany UK France

33. Unemployment rates in selected industrial countries Germany UK France

34. Unemployment rates in selected industrial countries Germany UK USA France

35. Unemployment rates in selected industrial countries Germany UK USA France

36. Unemployment rates in selected industrial countries Germany Japan UK USA France

37. Unemployment rates in selected industrial countries Germany Japan UK USA France

38. Unemployment rates in selected industrial countries Germany Japan UK OECD USA France

39. Unemployment rates in selected industrial countries Germany Japan UK OECD USA France

40. Disequilibrium unemployment Qe ASL Average (real) wage rate We ADL O No. of workers

41. Disequilibrium unemployment B A Q2 Q1 ASL Average (real) wage rate W2 We ADL O No. of workers

42. Equilibrium and disequilibrium unemployment ASL Average (real) wage rate e We ADL O Qe No. of workers

43. Equilibrium unemployment d Q2 ASL N Average (real) wage rate e We ADL O Qe No. of workers

44. Equilibrium and disequilibrium unemployment Disequilibrium unemployment ASL Average (real) wage rate b a W2 e We ADL O No. of workers

45. Equilibrium and disequilibrium unemployment Equilibrium unemployment ASL N Disequilibrium unemployment Average (real) wage rate b a c W2 e We ADL O No. of workers

46. Real-wage unemployment b b’ a Q2 Q1 ASL Average (real) wage rate W1 We ADL 2 ADL O Qe No. of workers

47. Demand-deficient unemployment W2 Q2 ASL Average (real) wage rate W1 ADL1 ADL2 O Q1 No. of workers

48. Arthur Okun • The connection between unemployment and GDP growth is often formally summarised by the statistical relationship known as "Oakum's law" as developed by the late economist Arthur Oakum in 1962, the "law" related decreases in the unemployment rate to increases in output growth. • In his original research, Oakum found that a 1-percentage-point decline in the unemployment rate was, on average, associated with additional output growth of about 3 percentage points • Oakum's law is now widely accepted as stating that a 1-percentage-point decrease in the unemployment rate is associated with additional output growth of about 2 percent • The negative correlation between changes in the unemployment rate and changes in GDP growth is viewed as one of the most consistent relationships in macroeconomics.

49. RELATIONSHIP BETWEENINFLATION AND UNEMPLOYMENT • Aggregate demand and inflation and unemployment • effects of increases in aggregate demand (relative to potential output) • how the objectives vary with the course of the business cycle • The Phillips curve • the original curve • the apparent policy implications

50. The original Phillips curve Wage inflation (%) Unemployment (%)