1 / 32

Introduction to Macroeconomics: Understanding the Grand View

Explore the differences between macroeconomics and microeconomics, the importance of aggregation, supply and demand in macroeconomics, and the concept of Gross Domestic Product (GDP). Gain insights into inflation, recession, economic growth, and the limitations of GDP.

tkristen
Download Presentation

Introduction to Macroeconomics: Understanding the Grand View

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. An Introduction to MacroeconomicsWhere the telescope ends, the microscope begins. Which of the two has the grander view?VICTOR HUGO www.cppa.gov.pk

  2. Macroeconomics vs. Microeconomics • Microeconomics • Decisions of individual units • No matter how large • Example: GE’s pricing policy • Macroeconomics • Behavior of entire economies • No matter how small • Example: inflation in Monaco • Economic aggregates: aggregate output, inflation, unemployment, …

  3. Macroeconomics & Microeconomics • Macroeconomics • Two areas of concern: • Effect of business cycle on wider economy • Factors affecting economic growth over long term • Assumes most low-level details • Resource allocation & income distribution • Finer details relatively unimportant • Microeconomics • Ignore macroeconomic issues • Focus – individual markets • Allocate resources • Distribute income

  4. Macroeconomics & Aggregation • Aggregation • Combine many individual markets into one overall market • Why can we aggregate? • Composition of demand & supply • In various markets • Important for microeconomics issues • Not important for macroeconomics issues • During economic fluctuations, markets move up or down together

  5. Supply & Demand in Macroeconomics • Aggregate demand (AD) curve • Quantity of domestic product – demanded • Each possible value of price level • Aggregate supply (AS) curve • Quantity of domestic product – supplied • Each possible value of price level

  6. Supply & Demand in Macroeconomics • Macroeconomists study • Inflation • Recession & unemployment (Business Cycles) • Economic growth

  7. Supply & Demand in Macroeconomics • Inflation • Sustained increase in price level • Outward shift of aggregate demand curve • Recession – period of time • Total output – declines • Production falls • People lose jobs • Inward shift of aggregate demand curve • Growth – period of time • Total output – increases

  8. Figure 1(inflation) Shift in the demand curve – First interpretation D1 D0 D Inflation • Sustained increase in price level • Outward shift of aggregate demand curve S S Price Price E E A P1 P0 P0 S S D D0 D1 Q0 0 0 Quantity Quantity (b) (a)

  9. Figure 2 (Recession) An economy slipping into a recession – Second interpretation S Recession – over a period of time • People lose jobs • Demand at the same price decreases • Inward shift of aggregate demand curve • New Equilibrium • Production falls • Total output – declines D0 D2 E B P2 P0 Price Level S D2 D0 Q0 Q2 0 Domestic Product

  10. Figure 3 Economic growth – shift in Supply and Demand curves S1 S0 Growth – period of time • Higher investment • Larger, more efficient production • Bigger supply at same price • Outward shift of Aggregate Supply • Higher income • Increase in spending • Bigger demand at same price • Outward shift of Aggregate Demand • Total Output – Increases D0 D1 E C Price Level S0 S1 D1 D0 Q0 Q1 0 Domestic Product

  11. Gross Domestic Product • Gross domestic product (GDP) • Signals direction of overall aggregate economy • Sum: money values • All final goods & services • Produced - domestic economy (Toyota produced in Pakistan vs. Japan) • Sold – organized markets (Marijuana in Colorado vs. Lahore) • Specified period of time • Usually a year

  12. What Gets Counted in GDP? • GDP - particular year • Add up money value of things • Goods & services • Produced within the year • Final goods & services • Production: geographic boundaries of country. • Organized markets

  13. Gross Domestic Product • Y: GDP • C: Personal Consumption Expenditures • Durable and Non-durable goods, Services • I: Gross Private Domestic Investment • Fixed investment, Structures and Equipment, Residential investment, Delta inventories • G: Government consumption, expenditures and gross investment • Federal – Civl, Defense, Provincial, Local • X: Export of Goods and Services • M: Import of Goods and Services

  14. Gross Domestic Product

  15. Gross Domestic Product

  16. Gross Domestic Product

  17. Gross Domestic Product • Nominal GDP • GDP in current dollars • Value outputs – current prices • Real GDP • Value outputs of different years at common prices • GDP in constant dollars

  18. Gross Domestic Product • Final goods and services • Purchased by their ultimate users • Intermediate good - purchased • For resale • For use in producing another good

  19. Gross Domestic Product • Limitations of GDP • Not measure: nation’s economic well-being • Includes only market activity • Housework, yard work, … • Places no value on leisure • Counted: “Bads” and “Goods” • Hurricane Katrina might increase GDP • Ecological costs • Not deducted from GDP • Needed: “Green GDP”

  20. GDP of Pakistan

  21. Inflation • Inflation is an increase in prices. • A situation of a sustained increase in the general level of price for goods and services in an economy. • Inflation means an increase in the cost of living as the price of goods and services rise. • Inflation, Deflation & Disinflation Problem: How many goods and services should be taken into account? Which prices should be used (retail vs wholesale)? Solution: Different types of inflation measure

  22. What Drives Inflation? Long-run • Printing more money is the only cause in long-run • Inability to collect tax or control expenditure • Too much money chasing too few goods. • “Inflation is always and everywhere a monetary phenomenon…” (Milton Friedman) • Fiscal theory of price level (financing must be sustainable) Short-run • Excess demand – Expanding economy = competition for fewer resources • Supply shocks – e.g. Oil prices • Expectations - Self-fulfilling prophecy

  23. What Drives Inflation? • Demand-pull inflation This occurs when AD increases at a faster rate than AS. If demand exceeds supply, firms will respond by pushing up prices (at least in the short run). • Cost-push inflation? This occurs when there is an increase in the cost of production for firms. Cost-push inflation could be caused by rising energy and commodity prices (especially of raw material)

  24. Consequence of Inflation

  25. Is disinflation a problem?

  26. Problems with disinflation

  27. Inflation in Pakistan

  28. Inflation measures in Pakistan National Income Accounting: set of rules that provide a way of measuring the flows of income and expenditures in the economy over period of time

  29. Balance of payments

  30. Energy intensity & GDP

  31. Economic Comparison of Pakistan with Other Countries www.cppa.gov.pk

  32. Comparison of Pakistan’s Electricity Sector with Other Countries

More Related