Ppm

Macroeconomic Objectives The major macroeconomic issues ✜

economic growth

✜

unemployment

✜

inflation

✜

balance of payments and exchange rates ✦ balance

of payments deficits and surpluses

✦ exchange

rate movements

The Circular Flow of Income ■

The inner flow

The circular flow of income Firms

Factor payments

Consumption of domestically produced goods and services (Cd)

Households

The Circular Flow of Income ■

■

Withdrawals ✜

net saving

✜

net taxes

✜

import expenditure

Injections ✜

investment

✜

government expenditure

✜

export expenditure

The circular flow of income INJECTIONS Export expenditure (X) Investment (I)

Factor payments

Consumption of domestically produced goods and services (Cd)

Government expenditure (G) BANKS, etc

Net saving (S)

GOV.

ABROAD

Import Net expenditure (M) taxes (T)

WITHDRAWALS

The Circular Flow of Income ■

The relationship between injections and withdrawals planned injections may not equal planned withdrawals

■

Equilibrium in the circular flow

■

The circular flow and the four macroeconomic objectives

The circular flow of income INJECTIONS Export expenditure (X) Investment (I)

Factor payments

Consumption of domestically produced goods and services (Cd)

Government expenditure (G) BANKS, etc

Net saving (S)

GOV.

ABROAD

Import Net expenditure (M) taxes (T)

WITHDRAWALS

Measuring national income ■ ■

GDP: the measure of national income Methods of measuring GDP the product approach ✜ the income approach ✜ the expenditure approach ✜

The circular flow of national income and expenditure

The circular flow of national income and expenditure (1) Production

(2) Incomes

(3) Expenditure

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 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

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

Growth and the Business Cycle ■

Growth in actual and potential growth

■

Economic growth and the business cycle ✜

fluctuations in actual growth

The business cycle

National output

Potential output

Actual output

O

Time

Growth and the Business Cycle ■

Growth in actual and potential output

■

Economic growth and the business cycle ✜

fluctuations in actual growth

✜

the phases of the business cycle

The business cycle

National output

Potential output

3 2

3 4 2

1

1

O

Time

4 Actual output

Growth and the Business Cycle ■

Growth in actual and potential output

■

Economic growth and the business cycle ✜

fluctuations in actual growth

✜

the phases of the business cycle

The business cycle

Potential output

National output

Trend output Actual output

O

Time

Growth and the Business Cycle ■

Growth in actual and potential growth

■

Economic growth and the business cycle

Growth and the Business Cycle ■

Growth in actual and potential growth

■

Economic growth and the business cycle ✜

fluctuations in actual growth

✜

the phases of the business cycle

✜

long-term output trend

✜

the business cycle in practice ✦ the

irregularity of the cycle

✦ the

length of the phases

✦ the

magnitude of the phases

Growth and the Business Cycle ■

■

Causes of fluctuations in actual growth ✜

aggregate demand

✜

aggregate demand relative to potential output

Actual growth in practice ✜

experience since 1970

Growth rates in selected industrial countries 10

UK France

Annual growth rate (%)

9 8

Germany USA

Japan

7 6 5 4 3 2 1 0 -1 -2 -3 1970

1975

1980

1985

1990

1995

2000

Growth and the Business Cycle ■

Causes of potential growth ✜

increases in the quantity of factors ✦ capital ✦ labour ✦ land

and raw materials ✦ the problem of diminishing returns ✜

■

increases in factor productivity

Policies to achieve growth demand-side and supply-side policies ✜ market-orientated policies ✜

Aggregate Demand and Supply ■

The aggregate demand curve

Price level

Aggregate demand and aggregate supply

AD O National output

Aggregate Demand and Supply ■

The aggregate demand curve ✜

Why aggregate demand curves slope downwards

Aggregate Demand and Supply ■

The aggregate demand curve ✜

Why aggregate demand curves slope downwards ✦ import

effect

Price level

Aggregate demand and aggregate supply

AD O National output

Aggregate Demand and Supply ■

The aggregate demand curve ✜

Why aggregate demand curves slope downwards ✦ import

effect

✦ interest-rate

effect

Price level

Aggregate demand and aggregate supply

AD O National output

Aggregate Demand and Supply ■

The aggregate demand curve ✜

Why aggregate demand curves slope downwards ✦ import

effect

✦ interest-rate ✦ savings

effect

effect

Price level

Aggregate demand and aggregate supply

AD O National output

Aggregate Demand and Supply ■

The aggregate demand curve ✜

Why aggregate demand curves slope downwards ✦ import

effect

✦ interest-rate ✦ savings

■

effect

effect

The aggregate supply curve

Aggregate demand and aggregate supply

Price level

AS

AD O National output

Aggregate Demand and Supply ■

The aggregate demand curve ✜

Why aggregate demand curves slope downwards ✦ import

effect

✦ interest-rate ✦ savings

■

effect

effect

The aggregate supply curve ✜

Why aggregate supply curves generally slope upwards

Aggregate demand and aggregate supply

Price level

AS

AD O National output

Aggregate Demand and Supply ■

The aggregate demand curve ✜

Why aggregate demand curves slope downwards ✦ import

effect

✦ interest-rate ✦ savings

■

effect

The aggregate supply curve ✜

■

effect

Why aggregate supply curves generally slope upwards

Equilibrium

Aggregate demand and aggregate supply

Price level

AS

Pe

AD O National output

Aggregate demand and aggregate supply

Price level

AS

Pe P2

b

a AD

O National output

Aggregate Demand and Supply ■

The aggregate demand curve ✜

Why aggregate demand curves slope downwards ✦ import

effect ✦ interest-rate effect ✦ savings effect ■

The aggregate supply curve ✜

■

Why AS curves generally slope upwards

Equilibrium ✜

Effect of a shift in the AD curve