The National Economy

1. The National Economy

2. The National Economy The Scope of Macroeconomics

3. COURSE OUTLINE 1. The National Economy 2. Macroeconomic Issues & Analysis: An Overview 3. Short-run Macroeconomic Equilibrium 4. Money and Interest Rates 5. The Relationship between Money and Goods Markets 6. Fiscal and Monetary Policy

4. Fathers of modern macroeconomists • John Maynard Keynes- The general theory of employment, interest and money in 1776 • Milton Friedman • James Tobin • Paul Samuelson • Robert E. Lucas Jr • Robert solow • N. Gregory Mankiw • R Paul Krugman • Paul M. Romer

5. macroeconomics • Macroeconomics is the economics of the economy as a whole and microeconomics is the economics of the single market. • Macroeconomics simplifies by ignoring differences among individual households. • Macroeconomics is important — and even interesting — because it affects all of us.

6. Important issues in macroeconomics • Why does the cost of living keep rising? • Why are millions of people unemployed, even when the economy is booming? • Why are there recessions? • Can the government do anything to combat recessions? Should it?

7. Important issues in macroeconomics • What is the government budget deficit? How does it affect the economy? • Why does Ghana have such a huge trade deficit? • Why are so many countries poor? What policies might help them grow out of poverty?

8. THE SCOPE OF MACROECONOMICS • The major macroeconomic issues • economic growth • unemployment • inflation • balance of payments and exchange rates

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

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

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

13. THE SCOPE OF MACROECONOMICS • Microeconomics and macroeconomics • The major macroeconomic issues • economic growth • unemployment • inflation • balance of payments and exchange rates • Government macroeconomic policy

14. THE SCOPE OF MACROECONOMICS • Microeconomics and macroeconomics • The major macroeconomic issues • economic growth • unemployment • inflation • balance of payments and exchange rates • Government macroeconomic policy • choosing between macroeconomic theories

15. THE SCOPE OF MACROECONOMICS • Microeconomics and macroeconomics • The major macroeconomic issues • economic growth • unemployment • inflation • balance of payments and exchange rates • Government macroeconomic policy • choosing between macroeconomic theories • choosing the order of priorities

16. Societies face trade-offs between economic objectives. • The goal of faster growth may conflict with that of greater equality; • The goal of lower unemployment may conflict with that of lower inflation. • The existence of trade-offs means that policy-makers must make choices

17. THE CIRCULAR FLOW OF INCOME • Aggregate demand (AD). This is the total spending on goods and services made within the country. • This spending consists of four elements. AD = C + I + G + X − M

18. The National Economy The Circular Flow of Income

19. THE CIRCULAR FLOW OF INCOME • The inner flow

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

21. THE CIRCULAR FLOW OF INCOME • Difference between money and income • Withdrawalsnet saving • net taxes • import expenditure • Injections • investment • government expenditure • export expenditure

22. 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

23. THE CIRCULAR FLOW OF INCOME • The relationship between injections and withdrawals • the links between them • planned injections may not equal planned withdrawals

24. The circular flow and the four macroeconomic objectives • If Injections exceed withdrawals, the level of expenditure will rise and AD will rise • Consequence on macroeconomic objectives • Unemployment will fall • Inflation will tend to rise • The exports and imports part of the balance of payments will tend to deteriorate • There will be economic growth

25. Equilibrium in the circular flow • When injections do not equal withdrawals, a state of disequilibrium will exist • This will set in train a process to bring the economy back to a state of equilibrium where injections are equal to withdrawals. • Assume injections exceeds withdrawals

26. The National Economy Measuring National Income

27. MEASURING NATIONAL INCOME • The three ways of measuring GDP • Gross domestic product (GDP): The value of output produced within the country over a 12-month period. • the product method • the income method • the expenditure method

28. The circular flow of national income and expenditure

29. The circular flow of national income and expenditure (1) Production (2) Incomes (3) Expenditure

30. Nominal versus real GDP • Nominal GDP, measures GDP in the prices ruling at the time and thus takes no account of inflation. • Real GDP, measures GDP in the prices that ruled in the base year. Thus we could measure each year’s GDP in, say, 1990 prices. • This would enable us to see how much real GDP had changed from one year to another. In other words, it would eliminate increases in money GDP that were merely due to an increase in prices.

31. Taking account of population: the use of per-capita measures • Taking account of exchange rates: the use of PPP measures: For example, $1 may exchange for, say, Ghs3.26. But will $1 in the US buy the same amount of goods as Ghs 3.26 in Ghana? The answer is almost certainly no

32. MEASURING NATIONAL INCOME • The product method • Non-marketed activities • Underground activities • the problem of double counting • the measuring of value added • gross value added (GVA) • some qualifications • government services • ownership of dwellings • taxes and subsidies on products

33. UK GVA (product-based measure): 2004 Agriculture, forestry and fishing £9,381 m Mining, energy and water supply £46,171 m Manufacturing £154,636 m Construction £67,619 m Wholesale and retail trade; repairs £128,382 m Hotels and restaurants £33,757 m Transport and communication £78,279 m Banking, finance, insurance, etc. £20,794 m Letting of property £254,669 m Public administration and defence £53,483 m Education, health and social work £131,918 m Other services £54,236 m

34. UK GVA (product-based measure): 2004 Agriculture, forestry and fishing £9,381 m Mining, energy and water supply £46,171 m Manufacturing £154,636 m Construction £67,619 m Wholesale and retail trade; repairs £128,382 m Hotels and restaurants £33,757 m Transport and communication £78,279 m Banking, finance, insurance, etc. £20,794 m Letting of property £254,669 m Public administration and defence £53,483 m Education, health and social work £131,918 m Other services £54,236 m Total GVA £1,033,324 m

35. UK GVA (product-based measure): 2004 0.9 4.5 15.0 6.5 12.4 3.3 7.6 2.0 24.6 5.2 12.8 5.2 100.0 Agriculture, forestry and fishing £9,381 m Mining, energy and water supply £46,171 m Manufacturing £154,636 m Construction £67,619 m Wholesale and retail trade; repairs £128,382 m Hotels and restaurants £33,757 m Transport and communication £78,279 m Banking, finance, insurance, etc. £20,794 m Letting of property £254,669 m Public administration and defence £53,483 m Education, health and social work £131,918 m Other services £54,236 m Total GVA £1,033,324 m Percentage of GVA

36. MEASURING NATIONAL INCOME • The income method • adding factor earnings (wages, rent, dividend, interest etc) • some qualifications • stock appreciation • transfer payments • direct taxes; taxes and subsidies on products

37. Compensation of employees (wages and salaries) £684,734 m Operating surplus (gross profit, rent and interest of firms government and other institutions) £293,494 m Mixed incomes £73,116 m Tax less subsidies on production (other than those on products) plus statistical discrepancy £17,980 m UK GVA by category of income: 2004

38. Compensation of employees (wages and salaries) £684,734 m Operating surplus (gross profit, rent and interest of firms government and other institutions) £293,494 m Mixed incomes £73,116 m Tax less subsidies on production (other than those on products) plus statistical discrepancy £17,980 m Total GVA £1,033,324 m UK GVA by category of income: 2004

39. 62.8 28.4 7.1 1.7 100.0 Compensation of employees (wages and salaries) £684,734 m Operating surplus (gross profit, rent and interest of firms government and other institutions) £293,494 m Mixed incomes £73,116 m Tax less subsidies on production (other than those on products) plus statistical discrepancy £17,980 m Total GVA £1,033,324 m UK GVA by category of income: 2004 Percentage of GVA

40. UK GDP: 2004 GVA (gross value added at basic prices) £1,033,324m

41. UK GDP: 2004 GVA (gross value added at basic prices) £1,033,324m plus Taxes on products £138,639m

42. UK GDP: 2004 GVA (gross value added at basic prices) £1,033,324m plus Taxes on products £138,639m less Subsidies on products £7,524m

43. UK GDP: 2004 GVA (gross value added at basic prices) £1,033,324m plus Taxes on products £138,639m less Subsidies on products £7,524m GDP (at market prices) £1,164,439m

44. MEASURING NATIONAL INCOME • The expenditure method • C + G + I + X – M • From GDP to Gross national income (GNY) is GDP at market prices + net income from abroad • From GNY to Net national income (NNY)

45. UK GDP by category of expenditure, GNY and NNY: 2004 £ million Consumption expenditure of households and NPISH (C) 760 678 Government final consumption (G) 246 810 Gross capital formation (I) 194 798 Exports of goods and services (X) 289 959 less Imports of goods and services (M) –328 384 Statistical discrepancy 578 Gross domestic product (GDP) (at market prices) 1 164 439 .

46. UK GDP by category of expenditure, GNY and NNY: 2004 £ million Consumption expenditure of households and NPISH (C) 760 678 Government final consumption (G) 246 810 Gross capital formation (I) 194 798 Exports of goods and services (X) 289 959 less Imports of goods and services (M) –328 384 Statistical discrepancy 578 Gross domestic product (GDP) (at market prices) 1 164 439 plus Net income from abroad 25 184 Gross national income (GNY) 1 189 623 .

47. UK GDP by category of expenditure, GNY and NNY: 2004 £ million Consumption expenditure of households and NPISH (C) 760 678 Government final consumption (G) 246 810 Gross capital formation (I) 194 798 Exports of goods and services (X) 289 959 less Imports of goods and services (M) –328 384 Statistical discrepancy 578 Gross domestic product (GDP) (at market prices) 1 164 439 plus Net income from abroad 25 184 Gross national income (GNY) 1 189 623 less Capital consumption (depreciation) –121 577 Net national income (NNY) 1 068 046

48. MEASURING NATIONAL INCOME • National income statistics: suitable measures of living standards? • items that are excluded • non-marketed items • the underground economy • production: poor indicator of welfare? • production does not equal consumption • human costs of production • externalities • the production of 'regrettables' • distribution of income • The use of ISEW

49. Contributions to the Index of Sustainable Economic Welfare (ISEW) (£ per capita, 1990 prices)

50. Contributions to the Index of Sustainable Economic Welfare (ISEW) (£ per capita, 1990 prices)