Beruflich Dokumente
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M a cro e co n o m ics
Introduction to
Macroeconomics
• Microeconomics examines the
behavior of individual decision-
making units—business firms and
households.
• Macroeconomics deals with the
economy as a whole; it examines
the behavior of economic
aggregates such as aggregate
income, consumption, investment,
and the overall level of prices.
– Aggregate behavior refers to the
behavior of all households and
firms together.
2
Introduction to
Macroeconomics
• Microeconomists generally
conclude that markets
work well.
Macroeconomists,
however, observe that
some important prices
often seem “sticky.”
• Sticky prices are prices
that do not always adjust
rapidly to maintain the 3
Introduction to
Macroeconomics
• Macroeconomists often
reflect on the
microeconomic principles
underlying
macroeconomic analysis,
or the microeconomic
foundations of
macroeconomics.
4
The Roots of
Macroeconomics
• The Great
Depression was
a period of severe
economic
contraction and
high
unemployment
that began in
1929 and
continued
throughout the 5
The Roots of
Macroeconomics
• Classical economists applied
microeconomic models, or “market
clearing” models, to economy-wide
problems.
• However, simple classical models
failed to explain the prolonged
existence of high unemployment
during the Great Depression. This
provided the impetus for the
development of macroeconomics.
6
The Roots of
Macroeconomics
• In 1936, John Maynard Keynes published The
General Theory of Employment, Interest, and
Money.
• Keynes believed governments could intervene in
the economy and affect the level of output and
employment.
• During periods of low private demand, the
government can stimulate aggregate demand
to lift the economy out of recession.
7
Recent Macroeconomic
History
• Fine-tuning was the phrase used by
Walter Heller to refer to the
government’s role in regulating
inflation and unemployment.
• The use of Keynesian policy to fine-
tune the economy in the 1960s, led
to disillusionment in the 1970s and
early 1980s.
8
Recent Macroeconomic
History
• Stagflation occurs when the overall
price level rises rapidly (inflation)
during periods of recession or high
and persistent unemployment
(stagnation).
9
So what is ‘the economy’?
• The economy is made up of four sectors sometimes
called economic agents:
• Households who receive payments (income) for their
V ita lkn o w le d g e
15
Inflation and Deflation
18
Unemployment
• The unemployment rate is the
percentage of the labor force that is
unemployed.
• The unemployment rate is a key
indicator of the economy’s health.
• The existence of unemployment
seems to imply that the aggregate
labor market is not in equilibrium.
Why do labor markets not clear
when other markets do?
19
Government in the
Macroeconomy
• There are three kinds of
policy that the
government has used to
influence the
macroeconomy:
1.Fiscal policy
2.Monetary policy
3.Growth or supply-side
policies
20
Government in the
Macroeconomy
• Fiscal policy refers to government
policies concerning taxes and
spending.
• Monetary policy consists of tools
used by the Federal Reserve to
control the quantity of money in the
economy.
• Growth policies are government
policies that focus on stimulating
aggregate supply instead of
aggregate demand.
21
Why Macro Economics
• B coz there are forces
attracting the economy
as whole
1)
The Components of
the Macroeconomy
26
The Three Market Arenas
27
The Three Market Arenas
• Households and the government purchase goods
and services (demand) from firms in the
goods-and services market, and firms
supply to the goods and services market.
• In the labor market, firms and government
purchase (demand) labor from households
(supply).
– The total supply of labor in the economy depends on
the sum of decisions made by households.
28
The Three Market Arenas
• In the money market—sometimes called the
financial market—households purchase stocks
and bonds from firms.
– Households supply funds to this market in the
expectation of earning income, and also demand
(borrow) funds from this market.
– Firms, government, and the rest of the world also
engage in borrowing and lending, coordinated by
financial institutions.
29
Financial Instruments
£
Consumer
expenditure
The circular flow of goods and incomes
Goods and services
£
Consumer
expenditure
The Economic Problem
• The circular flow of income
– firms and households
– goods markets
• real flows: goods and services
• money flows: consumer expenditure
– factor markets
The circular flow of goods and incomes
Goods and services
£
Consumer
expenditure
£
Consumer
expenditure
Wages, rent
dividends, etc.
£
Households Firms
Factor Input
Households Firms
Factor incomes
49
Circular Flow Between Firms and
Households
Spending on
goods and services
Households Firms
Services of
productive factors
Factor incomes
50
Circular Flow Between Firms and
Households
ng
Spending on
r i he
Expenditure
goods and services
s u t
e a in
m y
of vit
Goods and services
Output
a y ti
w ac
Households
n t c Firms
r e mi
f e no
i f coServices of
d e productive
y factors
3 he o m
t con Income
e Factor incomes
51
Three measures of national output
• Expenditure
– the sum of expenditures in the
economy
• Income
– the sum of incomes all factor
incomes
• Output
– the sum of output (value added)
produced in the economy
•
53
Circular Flow Between Firms and
Households
(corresponding flow of payments)
Spending on
goods and services
Leakages
Households Firms
Factor incomes
54
Injections into the Circular Flow
55
Circular Flow Between Firms and
Households
(corresponding flow of payments)
Spending on
goods and services
Injectio
ns
Households Firms
Factor incomes
56
Figure 2-2 Introduction of Saving and Investment to the Circular Flow
Diagram
Saving investments identity in
National Income Accounts
S im p le e co n o m y n ie th e r g o vt N o r fo re ig n tra d e
va lu e o f o u tp u t so ld in e co n o m y Y = C + I ( i)
W h a t h a p p e n s to u n so ld o u tp u t
T h is le a d s to in cre a se in ve n to rie s o f g o o d s
S in ce N a tio n a l in co m e Y = C + S ( ii)
Fro m id e n titie s ( i) a n d ( ii) w e g e t
C + I= Y = C + S
Le ft h a n d sid e C + I= Y C o m p o n e n ts o f A g g . d e m a n d )
so va lu e o f o u tp u t p ro d u ce d o r so ld e q u a l to to ta l Y re ce ive d
I= S
S im p le e co n o m y I = S
R e la tio n o f in ve stm e n t a n d sa vin g
T h e p o rtio n o f h o u se h o ld in co m e th a t is n o t
co n su m e d is ca lle d p e rso n a lsa vin g . T h e se
fu n d s a re ch a n n e le d to b u sin e ss firm s in tw o
w a ys:
Consumption of
Factor domestically
payments produced goods
and services (Cd)
The circular flow of income
Consumption of
Factor domestically
produced goods BANKS, etc
payments
and services (Cd)
Net
saving (S)
The circular flow of income
Investment (I)
Consumption of
Factor domestically
produced goods BANKS, etc
payments
and services (Cd)
Net
saving (S)
The circular flow of income
Investment (I)
Consumption of
Factor domestically
produced goods BANKS, etc GOV.
payments
and services (Cd)
Net
Net taxes (T)
saving (S)
The circular flow of income
Investment (I)
Government
expenditure (G)
Consumption of
Factor domestically
produced goods BANKS, etc GOV.
payments
and services (Cd)
Net
Net taxes (T)
saving (S)
The circular flow of income
Investment (I)
Government
expenditure (G)
Consumption of
Factor domestically
produced goods BANKS, etc GOV. ABROAD
payments
and services (Cd)
Import
Net expenditure (M)
Net taxes (T)
saving (S)
The circular flow of income
Export
expenditure (X)
Investment (I)
Government
expenditure (G)
Consumption of
Factor domestically
produced goods BANKS, etc GOV. ABROAD
payments
and services (Cd)
Import
Net expenditure (M)
Net taxes (T)
saving (S)
The circular flow of income
Export
expenditure (X)
Investment (I)
Government
expenditure (G)
Consumption of
Factor domestically
produced goods BANKS, etc GOV. ABROAD
payments
and services (Cd)
Import
Net expenditure (M)
Net taxes (T)
saving (S)
WITHDRAWALS
The circular flow of income
INJECTIONS
Export
expenditure (X)
Investment (I)
Government
expenditure (G)
Consumption of
Factor domestically
produced goods BANKS, etc GOV. ABROAD
payments
and services (Cd)
Import
Net expenditure (M)
Net taxes (T)
saving (S)
WITHDRAWALS
Economic Base Model Collapses All Spending
into Regional and Non-Regional
INJECTION
Export
expenditure (X)
Regional Purchases of
Factor regionally produced goods
OUTSIDE OF REGION
payments and services
Import
expenditure (M)
WITHDRAWAL
Transactions with foreign
sector
• Includes sales of goods and services,
assets, and transfers
• Exports - sales of domestically
produced goods to other countries
• Imports - goods bought from other
countries
With Government sector
I + G = S+T - (iv)
By rearranging we obtain
G- T = S -I ----- (v)
If Govt budget is not balanced
G > T ( Budget deficit )
Govt borrow from financial market
For this purpose , pvt invt < Savings
Govt borrowing reduces pvt investment
Govt borrowing crowds out pvt invt
• Leakages and Injections
• Note that
• C + S + T = C + I +G +NX
• -C -C
•
• S + T ≡ I + G + NX (4)
• Leakages (S+T) must be exactly balanced
by injections of non consumption
spending (I+G+NX)
• Equation 4 is the magic equation. Its
technical name “the leakages-injection)
identity”.
• If there is a budget deficit (T-G) < 0 then,
• I + NX – S < 0 (T-
• If T<G, the government is running a deficit,
there are 3 implications
1.Budget deficit could make (I) smaller.
2.Budget deficit requires that (S) must rise to
avoid any downward pressure on total
investment (I+NX).
3.If S does not increase, to avoid a decline in
(I+NX), there must be more borrowing
from foreigners and a decline in lending
to foreigners.
•e.g.,
• T – G = (I + NX) - S
• -1.8 = (17.8 – 1) – 18.4 (deficit financed by
foreign borrowing (-NX), and S to be greater
than I)
• 4.4 = (20.8 – 4) – 12.4 (surplus with greater
borrowing (-NX) allowed I to increase to 20.8
• The government budget and the twin
deficits
• Rearrange eq. 4 to show the uses of a
government budget surplus
• T – G = (I + NX) – S (5)
• If T>G, there are 3 ways that a
government budget surplus can be
used
1.A budget surplus allows private
savings to decline without a need
for a decline of total investment
(I+NX).
2.A budget surplus can stimulate
domestic investment (I)
3.a budget surplus can boost foreign
T h u s in o p e n e co n o m y
N a tio n a l In co m e = C + I + G + X n
X n re p re se n ts n e t e x p o rts ( X - M )
N . I ca n e ith e r b e co n su m e d , sa v e d o r p a id a s Ta x e s
T h e re fo re C + I + G + X n = C + S + T
Is ,
C is C o m m o n o n b o th sid e s
I+ G + X n = S+T
S h o w s su m o f p v t In v t , G o v t E x p a n d X - M is e q u a l
to th e su m o f sa v in g s a n d ta x re v e n u e .
(b) Certain transactions are excluded from national
income accounting
-> Govt purchase good and Services and creates agg demand
Y = C + I + G + Nx
Accordingly DY = Y + R - T
So that Y = DY + ( T - R )
DY = C + S
From DY = Y + R - T and DY = C + S
we Obtain
C + S = T + R - T and
C = { Y + R - T } - S - DY - S ( As DY = C + S )
C + I + G + NX , substituting we get .
C = ( Y + R - T )- S
OR
C = C + I + G + Nx + R - T - S
As Y = C + I + G + Nx
Rearranging S - I = ( G + R - T ) + NX
When X = M , Nx = 0
even it Nx = 0
so I<S
Even if budget deficit is zero
Y = C + I + G + Nx ( X - M ), DY = Y + R - T = C + S
Accordingly we obtain
y = DY + T - R = C + S + T - R ( As DY = C + S )
= C + I + G + Nx
with foreign Trade included Y = C + I + G + Nx
C + S + T - R = C + I + G + Nx
OR
S - I = G + R + Nx - T
(Components)
•
Sales P 20,000
Expenses:
Wages 8000
Rent 4000
Interest 2000
Total 14,000
Profit 6,000
GDP=Sum of Payments to 20,000 P 20,000
factors
Value Added Approach
H o u se w iv e s
h o u se re p a irs
w a sh in g a n d C le a n in g
-> These goods already exist and their values are included in
previous year's N . I
-> IMF has viewed that the production of output and income
generated will be a part of GDP Of the country where they
are located
-> and many a times they maintain the record in value terms rather
than physical terms
-> only a rough estimate of the value of these outputs can be made
-> B coz in rural areas people get income from various sources
like working on farm land doing part time jobs etc
-> The national income committee arise has noticed that the
Statistical data available in agri . and small Scale sector is
inadequate and unreliable
5 . other problems
-> Many facts and Figures for income method are lacking
* Nominal GDP
Measures the value of output Of goods and services
produced in a given period at the current prices
su p p o se if N o m in a l G D P a t 2 0 0 7 is 7 8 8 5 5
R e a l G D P o f 2 0 0 7 is 6 3 1 7 0
G D P D e fla to r = N o m in a lG D P / R e a lG D P
7 8 8 5 3 = I. 25
63170
122
Calculation of Real GDP
124
Real and Nominal GDP
125
Real and Nominal GDP
126
Real and Nominal GDP
127
Real and Nominal GDP
128
GDP, GNP, Depreciation