Description
This is a presentation about macroeconomic objectives of the country, circular flow of income, national income measurement, types of inflation.
Aggregate Demand and Supply and Macroeconomic Problems
Macroeconomic Objectives
• Distinction between microeconomics and macroeconomics • The major macroeconomic issues
– economic growth – unemployment – inflation – balance of payments and exchange rates
• balance of payments deficits and surpluses
• exchange rate movements
Economic growth (average % per annum), Unemployment (average %), Inflation (average % per annum)
France Germany Growth 1960-9 1970-9 1980-9 1990-9 Unemployment 1960-9 1970-9 1980-9 1990-9 Inflation 1960-9 1970-9 1980-9 1990-9 Italy Japan UK USA EU(15) India
Brazil Ma
7.5 3.2 2.2 1.7
4.4 2.6 1.8 2.1
5.3 3.8 2.4 1.4
10.9 4.3 4.0 1.3
2.9 2.0 2.4 2.2
4.3 2.8 2.5 3.3
3.5 3.2 2.2 1.9
2.5 3.5 5.5 6.9
5.4 8.1 3.0 3.2
1.5 3.7 9.0 11.2
0.9 2.3 5.9 7.5
5.1 6.4 9.5 10.6
1.3 1.7 2.5 3.0
2.2 4.5 10.0 5.8
4.1 6.1 7.2 5.8
2.5 4.0 9.3 9.9
n/a n/a n/a
n/a n/a n/a n/a
4.2 9.4 7.3 1.9
3.2 5.0 2.9 2.5
4.4 13.9 11.2 3.9
4.9 9.0 2.5 1.1
4.1 13.0 7.4 3.5
2.8 6.8 5.5 2.8
3.7 10.3 7.4 3.2
9.1 19.2 8.9 6.9
46.1 38.6 227.8 300.9
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) Government expenditure (G) BANKS, etc GOV. ABROAD
Factor payments
Consumption of domestically produced goods and services (Cd)
Net saving (S)
Import Net expenditure (M) taxes (T)
WITHDRAWALS
The Circular Flow of Income
• The relationship between injections and withdrawals
– the links between them
The circular flow of income
INJECTIONS
Export expenditure (X) Investment (I) Government expenditure (G) BANKS, etc GOV. ABROAD
Factor payments
Consumption of domestically produced goods and services (Cd)
Net saving (S)
Import Net expenditure (M) taxes (T)
WITHDRAWALS
The Circular Flow of Income
• The relationship between injections and withdrawals
– the links between them – planned injections may not equal planned withdrawals
The Circular Flow of Income
• The relationship between injections and withdrawals
– the links between them – planned injections may not equal planned withdrawals
• Equilibrium in the circular flow
The circular flow of income
INJECTIONS
Export expenditure (X) Investment (I) Government expenditure (G) BANKS, etc GOV. ABROAD
Factor payments
Consumption of domestically produced goods and services (Cd)
Net saving (S)
Import Net expenditure (M) taxes (T)
WITHDRAWALS
The Circular Flow of Income
• The relationship between injections and withdrawals
– the links between them – 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) Government expenditure (G) BANKS, etc GOV. ABROAD
Factor payments
Consumption of domestically produced goods and services (Cd)
Net saving (S)
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 product approach
– measuring GVA
INDIA GDP product-based measure: 2004-05 (Rs crore)
Agriculture, forestry and fishing Rs 598163 Mining and Quarrying Rs 79962 19.70 2.63
Manufacturing Rs 455789
Construction Rs 174571 Wholesale and retail trade Rs 350421
15.01 5.75 11.54
Percentage of GVA
Hotels and restaurants Rs 26097
Transport Storage and communication Rs 202079 Banking, finance, insurance, etc. Rs 163218 Real estate and dwelling Rs 308370 Public administration and defence 140467 Community and Personal services 338591 Other services 198124
0.85 6.65
5.37 10.15 4.62 11.15 6.52 100.0
Gross value added (GVA) at basic prices
Rs 3035852
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
GVA by category of income: 2004-05
Compensation of employees (wages and salaries) Rs 960982
31.65
Percentage of GVA
Operating surplus (gross profit, rent and interest of firms government and other institutions) Rs 1286451 Mixed incomes Rs 478103 Tax less subsidies on production plus statistical discrepancy Rs 310315 Gross value added (GVA) at basic prices Rs 3035852
42.37
15.8
10.22
100.0
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
– from GVA to GDP
GDP: 2004-05
Gross value added (GVA) at basic prices Rs 3035852
GDP: 2004-05
Gross value added (GVA) at basic prices Rs 3035852 plus Taxes on products Rs 432549
GDP: 2004-05
Gross value added (GVA) at basic prices Rs 3035852 plus Taxes on products less Subsidies on products Rs 432549 Rs 121434
GDP: 2004-05
Gross value added (GVA) at basic prices Rs 3035852 plus Taxes on products less Subsidies on products Rs 432549 Rs 121434
GDP (at market prices)
Rs 3589835
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
GDP at market prices by category of expenditure: 2004-05
Rs crores Consumption expenditure of households 2296757 % of GDP 63.6
GDP at market prices by category of expenditure: 2004-05
Rs crores Consumption expenditure of households Government final consumption (G) 405945 11.3 2296757 % of GDP 63.6
GDP at market prices by category of expenditure: 2004-05
Rs crores Consumption expenditure of households Government final consumption (G) 405945 Gross capital formation (I) 945403 26.3 11.3 2296757 % of GDP 63.6
GDP at market prices by category of expenditure: 2004-05
Rs crores Consumption expenditure of households and Government final consumption (G) 405945 Gross capital formation (I) 945403 Exports of goods and services (X) 861560 Imports of goods and services (M) –920074 –25.6 24 26.3 11.3 2296757 % of GDP 63.6
GDP at market prices by category of expenditure: 2004-05
Rs crores Consumption expenditure of households Government final consumption (G) 405945 Gross capital formation (I) 945403 Exports of goods and services (X) 861560 Imports of goods and services (M) –920074 Statistical discrepancy 243.75 0.006 –25.6 24 26.3 11.3 2296757 % of GDP 63.6
GDP at market prices by category of expenditure: 2004-05
Rs crores Consumption expenditure of households Government final consumption (G) 405945 Gross capital formation (I) 945403 Exports of goods and services (X) 861560 Imports of goods and services (M) –920074 Statistical discrepancy 243.75 GDP at market prices 3589835 0.006 100.0 –25.6 24 26.3 11.3 2296757 % of GDP 63.6
Measuring national income
• • • • • GDP: the measure of national income The product approach The income approach The expenditure approach From GDP to net national income (NNY)
GDP, GNP and NNY at market prices: 2004-05
Rs crore Gross domestic product (GDP) Plus net income from abroad Gross national income (GNP) 3589835 -18310 3571524
GDP, GNP and NNP at market prices: 2004-05
Rs crore Gross domestic product (GDP) Plus net income from abroad Gross national income (GNY) Less capital consumption (depreciation) Net national income (NNY) 3589835 -18310 3571524 329893 3241630
Economic Growth and the Business Cycle
• Growth in actual and potential output
• Economic growth and the business cycle
– fluctuations in actual growth
The business cycle
Potential output
National output
Actual output
O
Time
Economic 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
3 3 4 2 1 1 2 4 Actual output
O
Time
Economic 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 – trend growth
The business cycle
Potential output
National output
Trend output
Actual output
O
Time
Economic Growth and the Business Cycle
• Economic growth and the business cycle
– fluctuations in actual growth
– the phases of the business cycle
– trend growth
– the business cycle in practice
Economic Growth and the Business Cycle
• Economic growth and the business cycle
– fluctuations in actual growth
– the phases of the business cycle
– trend growth
– the business cycle in practice
• the irregularity of the cycle
Economic Growth and the Business Cycle
• Economic growth and the business cycle
– fluctuations in actual growth
– the phases of the business cycle
– trend growth
– the business cycle in practice
• the irregularity of the cycle
• the length of the phases
Economic Growth and the Business Cycle
• Economic growth and the business cycle
– fluctuations in actual growth
– the phases of the business cycle
– trend growth
– the business cycle in practice
• the irregularity of the cycle
• the length of the phases
• the magnitude of the phases
Economic Growth and the Business Cycle
• Causes of actual growth
– aggregate demand
– aggregate demand relative to potential output
• Actual growth in practice
– experience since 1970
Growth rates in selected industrial countries
10 9
UK
Annual growth rate (%)
8 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000
Growth rates in selected industrial countries
10 9
UK
Annual growth rate (%)
8 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000
Growth rates in selected industrial countries
10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000
UK France
Annual growth rate (%)
Growth rates in selected industrial countries
10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000
UK France
Annual growth rate (%)
Growth rates in selected industrial countries
10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000
UK France
Germany
Annual growth rate (%)
Growth rates in selected industrial countries
10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000
UK France
Germany
Annual growth rate (%)
Growth rates in selected industrial countries
10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000
UK France
Germany USA
Annual growth rate (%)
Growth rates in selected industrial countries
10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000
UK France
Germany USA
Annual growth rate (%)
Growth rates in selected industrial countries
10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000
UK France
Germany USA
India
Annual growth rate (%)
Growth rates in selected industrial countries
10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000
UK France
Germany USA
India
Annual growth rate (%)
Economic 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 & interventionist policies
Unemployment
• The meaning of 'unemployment'
• Types of Unemployment
– standardised unemployment (ILO/OECD)
Flows into and out of unemployment
From jobs
INFLOWS (per period of time)
UNEMPLOYMENT
Flows into and out of unemployment
From jobs
•People made redundant
INFLOWS (per period of time)
UNEMPLOYMENT
Flows into and out of unemployment
From jobs
•People made redundant •People sacked
INFLOWS (per period of time)
UNEMPLOYMENT
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off
INFLOWS (per period of time)
UNEMPLOYMENT
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
INFLOWS (per period of time)
UNEMPLOYMENT
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
From outside the labour force
INFLOWS (per period of time)
UNEMPLOYMENT
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
From outside the labour force
•School/college leavers
INFLOWS (per period of time)
UNEMPLOYMENT
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
From outside the labour force
•School/college leavers •People returning to the labour force (e.g. after raising children)
INFLOWS (per period of time)
UNEMPLOYMENT
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
From outside the labour force
•School/college leavers •People returning to the labour force (e.g. after raising children)
INFLOWS (per period of time)
UNEMPLOYMENT To jobs OUTFLOWS (per period of time)
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
From outside the labour force
•School/college leavers •People returning to the labour force (e.g. after raising children)
INFLOWS (per period of time)
UNEMPLOYMENT To jobs OUTFLOWS (per period of time)
•People taking new jobs
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
From outside the labour force
•School/college leavers •People returning to the labour force (e.g. after raising children)
INFLOWS (per period of time)
UNEMPLOYMENT To jobs OUTFLOWS (per period of time)
•People taking new jobs •People returning to old jobs who had been temporarily laid off
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
From outside the labour force
•School/college leavers •People returning to the labour force (e.g. after raising children)
INFLOWS (per period of time)
UNEMPLOYMENT To jobs OUTFLOWS (per period of time) To outside the labour force
•People taking new jobs •People returning to old jobs who had been temporarily laid off
•People who have become disheartened and give up looking for a job
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
From outside the labour force
•School/college leavers •People returning to the labour force (e.g. after raising children)
INFLOWS (per period of time)
UNEMPLOYMENT To jobs OUTFLOWS (per period of time) To outside the labour force
•People taking new jobs •People returning to old jobs who had been temporarily laid off
•People who have become disheartened and give up looking for a job •People who have reached retirement age
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
From outside the labour force
•School/college leavers •People returning to the labour force (e.g. after raising children)
INFLOWS (per period of time)
UNEMPLOYMENT To jobs OUTFLOWS (per period of time) To outside the labour force
•People taking new jobs •People returning to old jobs who had been temporarily laid off
•People who have become disheartened and give up looking for a job •People who have reached retirement age •People who temporarily withdraw from labour force (e.g. to raise a family)
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
From outside the labour force
•School/college leavers •People returning to the labour force (e.g. after raising children)
INFLOWS (per period of time)
UNEMPLOYMENT To jobs OUTFLOWS (per period of time) To outside the labour force
•People taking new jobs •People returning to old jobs who had been temporarily laid off
•People who have become disheartened and give up looking for a job •People who have reached retirement age •People who temporarily withdraw from labour force (e.g. to raise a family) •People who emigrate
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
From outside the labour force
•School/college leavers •People returning to the labour force (e.g. after raising children)
INFLOWS (per period of time)
UNEMPLOYMENT To jobs OUTFLOWS (per period of time) To outside the labour force
•People taking new jobs •People returning to old jobs who had been temporarily laid off
•People who have become disheartened and give up looking for a job •People who have reached retirement age •People who temporarily withdraw from labour force (e.g. to raise a family) •People who emigrate •People who die
Unemployment
• Unemployment and the labour market
– the aggregate demand and supply of labour
– equilibrium in the model
Aggregate demand and supply of labour
ASL
Average (real) wage rate
We
ADL
O Qe
No. of workers
Unemployment
• Unemployment and the labour market
– the aggregate demand and supply of labour
– equilibrium in the model
– disequilibrium unemployment
Disequilibrium unemployment
ASL
Average (real) wage rate
B W2
A
We
ADL
O Q
2
Q
No. of workers
1
Unemployment
• Unemployment and the labour market
– the aggregate demand and supply of labour – equilibrium in the model – disequilibrium unemployment – equilibrium unemployment
Equilibrium unemployment
ASL
Average (real) wage rate
e
We
ADL
O Qe
No. of workers
Equilibrium unemployment
ASL N
Average (real) wage rate
e
We
d
ADL
O Qe Q2
No. of workers
Equilibrium and disequilibrium unemployment
ASL
Average (real) wage rate
e
We
ADL
O Qe
No. of workers
Equilibrium and disequilibrium unemployment
ASL
Average (real) wage rate
Disequilibrium unemployment
b W2 e
a
We
ADL
O
No. of workers
Equilibrium and disequilibrium unemployment
ASL
Average (real) wage rate
Disequilibrium unemployment
N
b W2 e
a
c
We
Equilibrium unemployment
ADL
O
No. of workers
Unemployment
• Disequilibrium unemployment
– real-wage (classical) unemployment
– demand-deficient (cyclical) unemployment
– unemployment arising from a growth in the labour supply
Unemployment
• Equilibrium unemployment
– frictional (search) unemployment – structural unemployment
• changing pattern of demand
• technological unemployment • regional unemployment
– seasonal unemployment
Aggregate Demand and Supply
• The aggregate demand curve
Aggregate demand and aggregate supply
Price level
AD
O
National output
Aggregate Demand and Supply
• The aggregate demand curve
– Why aggregate demand curves slope downwards
• import effect
Aggregate demand and aggregate supply
Price level
AD
O
National output
Aggregate Demand and Supply
• The aggregate demand curve
– Why aggregate demand curves slope downwards
• import effect • interest-rate effect
Aggregate demand and aggregate supply
Price level
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
Aggregate demand and aggregate supply
Price level
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
Aggregate demand and aggregate supply
AS
Price level
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 aggregate supply curves generally slope upwards
Aggregate demand and aggregate supply
AS
Price level
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 aggregate supply curves generally slope upwards
• Equilibrium
Aggregate demand and aggregate supply
AS
Price level
Pe
AD
O
National output
Aggregate demand and aggregate supply
AS
Price level
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
Inflation
• Defining inflation
• The costs of inflation
– redistribution
– uncertainty
– balance of payments
– resources used to cope with inflation
• Experience of inflation since 1965
Inflation
• Types of inflation
– demand pull
Demand-pull inflation
AS
Price level
P1
AD1
O Q1
National output
Demand-pull inflation
AS
Price level
P1
AD2 AD1
O Q1
National output
Demand-pull inflation
AS
Price level
P2
P1
AD2 AD1
O Q1 Q2
National output
Inflation
• Types of inflation
– demand pull – cost push
Inflation
• Types of inflation
– demand pull – cost push
• wage push
Inflation
• Types of inflation
– demand pull – cost push
• wage push • profit push
Inflation
• Types of inflation
– demand pull – cost push
• wage push • profit push • import-price push
Cost-push inflation
AS1
Price level
P1
AD
O Q1
National output
Cost-push inflation
AS2 AS1
Price level
P1
AD
O Q1
National output
Cost-push inflation
AS2 AS1
Price level
P2
P1
AD
O Q2 Q1
National output
Inflation
• Types of inflation
– demand pull
– cost push
• wage push
• profit push • import-price push
– the interaction of demand-pull and costpush inflation
The interaction of demand-pull and cost-push inflation
AS1
Price level
P1
AD1
O
National output
The interaction of demand-pull and cost-push inflation
AS2
AS1
Price level
P2
P1
AD2 AD1
O
National output
The interaction of demand-pull and cost-push inflation
AS3AS
2
AS1
Price level
P3
P2
P1
AD3 AD2 AD1
O
National output
Inflation
• Types of inflation
– demand pull – cost push
• wage push • profit push • import-price push
– the interaction of demand-pull and costpush inflation – structural (demand shift)
Inflation
• Types of inflation
– demand pull – cost push
• wage push • profit push • import-price push
– the interaction of demand-pull and costpush inflation – structural (demand shift) – expectations and inflation
Inflation
• Policies to tackle inflation
– demand-side policies – supply-side policies
doc_238047513.pptx
This is a presentation about macroeconomic objectives of the country, circular flow of income, national income measurement, types of inflation.
Aggregate Demand and Supply and Macroeconomic Problems
Macroeconomic Objectives
• Distinction between microeconomics and macroeconomics • The major macroeconomic issues
– economic growth – unemployment – inflation – balance of payments and exchange rates
• balance of payments deficits and surpluses
• exchange rate movements
Economic growth (average % per annum), Unemployment (average %), Inflation (average % per annum)
France Germany Growth 1960-9 1970-9 1980-9 1990-9 Unemployment 1960-9 1970-9 1980-9 1990-9 Inflation 1960-9 1970-9 1980-9 1990-9 Italy Japan UK USA EU(15) India
Brazil Ma
7.5 3.2 2.2 1.7
4.4 2.6 1.8 2.1
5.3 3.8 2.4 1.4
10.9 4.3 4.0 1.3
2.9 2.0 2.4 2.2
4.3 2.8 2.5 3.3
3.5 3.2 2.2 1.9
2.5 3.5 5.5 6.9
5.4 8.1 3.0 3.2
1.5 3.7 9.0 11.2
0.9 2.3 5.9 7.5
5.1 6.4 9.5 10.6
1.3 1.7 2.5 3.0
2.2 4.5 10.0 5.8
4.1 6.1 7.2 5.8
2.5 4.0 9.3 9.9
n/a n/a n/a
n/a n/a n/a n/a
4.2 9.4 7.3 1.9
3.2 5.0 2.9 2.5
4.4 13.9 11.2 3.9
4.9 9.0 2.5 1.1
4.1 13.0 7.4 3.5
2.8 6.8 5.5 2.8
3.7 10.3 7.4 3.2
9.1 19.2 8.9 6.9
46.1 38.6 227.8 300.9
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) Government expenditure (G) BANKS, etc GOV. ABROAD
Factor payments
Consumption of domestically produced goods and services (Cd)
Net saving (S)
Import Net expenditure (M) taxes (T)
WITHDRAWALS
The Circular Flow of Income
• The relationship between injections and withdrawals
– the links between them
The circular flow of income
INJECTIONS
Export expenditure (X) Investment (I) Government expenditure (G) BANKS, etc GOV. ABROAD
Factor payments
Consumption of domestically produced goods and services (Cd)
Net saving (S)
Import Net expenditure (M) taxes (T)
WITHDRAWALS
The Circular Flow of Income
• The relationship between injections and withdrawals
– the links between them – planned injections may not equal planned withdrawals
The Circular Flow of Income
• The relationship between injections and withdrawals
– the links between them – planned injections may not equal planned withdrawals
• Equilibrium in the circular flow
The circular flow of income
INJECTIONS
Export expenditure (X) Investment (I) Government expenditure (G) BANKS, etc GOV. ABROAD
Factor payments
Consumption of domestically produced goods and services (Cd)
Net saving (S)
Import Net expenditure (M) taxes (T)
WITHDRAWALS
The Circular Flow of Income
• The relationship between injections and withdrawals
– the links between them – 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) Government expenditure (G) BANKS, etc GOV. ABROAD
Factor payments
Consumption of domestically produced goods and services (Cd)
Net saving (S)
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 product approach
– measuring GVA
INDIA GDP product-based measure: 2004-05 (Rs crore)
Agriculture, forestry and fishing Rs 598163 Mining and Quarrying Rs 79962 19.70 2.63
Manufacturing Rs 455789
Construction Rs 174571 Wholesale and retail trade Rs 350421
15.01 5.75 11.54
Percentage of GVA
Hotels and restaurants Rs 26097
Transport Storage and communication Rs 202079 Banking, finance, insurance, etc. Rs 163218 Real estate and dwelling Rs 308370 Public administration and defence 140467 Community and Personal services 338591 Other services 198124
0.85 6.65
5.37 10.15 4.62 11.15 6.52 100.0
Gross value added (GVA) at basic prices
Rs 3035852
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
GVA by category of income: 2004-05
Compensation of employees (wages and salaries) Rs 960982
31.65
Percentage of GVA
Operating surplus (gross profit, rent and interest of firms government and other institutions) Rs 1286451 Mixed incomes Rs 478103 Tax less subsidies on production plus statistical discrepancy Rs 310315 Gross value added (GVA) at basic prices Rs 3035852
42.37
15.8
10.22
100.0
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
– from GVA to GDP
GDP: 2004-05
Gross value added (GVA) at basic prices Rs 3035852
GDP: 2004-05
Gross value added (GVA) at basic prices Rs 3035852 plus Taxes on products Rs 432549
GDP: 2004-05
Gross value added (GVA) at basic prices Rs 3035852 plus Taxes on products less Subsidies on products Rs 432549 Rs 121434
GDP: 2004-05
Gross value added (GVA) at basic prices Rs 3035852 plus Taxes on products less Subsidies on products Rs 432549 Rs 121434
GDP (at market prices)
Rs 3589835
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
GDP at market prices by category of expenditure: 2004-05
Rs crores Consumption expenditure of households 2296757 % of GDP 63.6
GDP at market prices by category of expenditure: 2004-05
Rs crores Consumption expenditure of households Government final consumption (G) 405945 11.3 2296757 % of GDP 63.6
GDP at market prices by category of expenditure: 2004-05
Rs crores Consumption expenditure of households Government final consumption (G) 405945 Gross capital formation (I) 945403 26.3 11.3 2296757 % of GDP 63.6
GDP at market prices by category of expenditure: 2004-05
Rs crores Consumption expenditure of households and Government final consumption (G) 405945 Gross capital formation (I) 945403 Exports of goods and services (X) 861560 Imports of goods and services (M) –920074 –25.6 24 26.3 11.3 2296757 % of GDP 63.6
GDP at market prices by category of expenditure: 2004-05
Rs crores Consumption expenditure of households Government final consumption (G) 405945 Gross capital formation (I) 945403 Exports of goods and services (X) 861560 Imports of goods and services (M) –920074 Statistical discrepancy 243.75 0.006 –25.6 24 26.3 11.3 2296757 % of GDP 63.6
GDP at market prices by category of expenditure: 2004-05
Rs crores Consumption expenditure of households Government final consumption (G) 405945 Gross capital formation (I) 945403 Exports of goods and services (X) 861560 Imports of goods and services (M) –920074 Statistical discrepancy 243.75 GDP at market prices 3589835 0.006 100.0 –25.6 24 26.3 11.3 2296757 % of GDP 63.6
Measuring national income
• • • • • GDP: the measure of national income The product approach The income approach The expenditure approach From GDP to net national income (NNY)
GDP, GNP and NNY at market prices: 2004-05
Rs crore Gross domestic product (GDP) Plus net income from abroad Gross national income (GNP) 3589835 -18310 3571524
GDP, GNP and NNP at market prices: 2004-05
Rs crore Gross domestic product (GDP) Plus net income from abroad Gross national income (GNY) Less capital consumption (depreciation) Net national income (NNY) 3589835 -18310 3571524 329893 3241630
Economic Growth and the Business Cycle
• Growth in actual and potential output
• Economic growth and the business cycle
– fluctuations in actual growth
The business cycle
Potential output
National output
Actual output
O
Time
Economic 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
3 3 4 2 1 1 2 4 Actual output
O
Time
Economic 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 – trend growth
The business cycle
Potential output
National output
Trend output
Actual output
O
Time
Economic Growth and the Business Cycle
• Economic growth and the business cycle
– fluctuations in actual growth
– the phases of the business cycle
– trend growth
– the business cycle in practice
Economic Growth and the Business Cycle
• Economic growth and the business cycle
– fluctuations in actual growth
– the phases of the business cycle
– trend growth
– the business cycle in practice
• the irregularity of the cycle
Economic Growth and the Business Cycle
• Economic growth and the business cycle
– fluctuations in actual growth
– the phases of the business cycle
– trend growth
– the business cycle in practice
• the irregularity of the cycle
• the length of the phases
Economic Growth and the Business Cycle
• Economic growth and the business cycle
– fluctuations in actual growth
– the phases of the business cycle
– trend growth
– the business cycle in practice
• the irregularity of the cycle
• the length of the phases
• the magnitude of the phases
Economic Growth and the Business Cycle
• Causes of actual growth
– aggregate demand
– aggregate demand relative to potential output
• Actual growth in practice
– experience since 1970
Growth rates in selected industrial countries
10 9
UK
Annual growth rate (%)
8 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000
Growth rates in selected industrial countries
10 9
UK
Annual growth rate (%)
8 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000
Growth rates in selected industrial countries
10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000
UK France
Annual growth rate (%)
Growth rates in selected industrial countries
10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000
UK France
Annual growth rate (%)
Growth rates in selected industrial countries
10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000
UK France
Germany
Annual growth rate (%)
Growth rates in selected industrial countries
10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000
UK France
Germany
Annual growth rate (%)
Growth rates in selected industrial countries
10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000
UK France
Germany USA
Annual growth rate (%)
Growth rates in selected industrial countries
10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000
UK France
Germany USA
Annual growth rate (%)
Growth rates in selected industrial countries
10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000
UK France
Germany USA
India
Annual growth rate (%)
Growth rates in selected industrial countries
10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000
UK France
Germany USA
India
Annual growth rate (%)
Economic 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 & interventionist policies
Unemployment
• The meaning of 'unemployment'
• Types of Unemployment
– standardised unemployment (ILO/OECD)
Flows into and out of unemployment
From jobs
INFLOWS (per period of time)
UNEMPLOYMENT
Flows into and out of unemployment
From jobs
•People made redundant
INFLOWS (per period of time)
UNEMPLOYMENT
Flows into and out of unemployment
From jobs
•People made redundant •People sacked
INFLOWS (per period of time)
UNEMPLOYMENT
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off
INFLOWS (per period of time)
UNEMPLOYMENT
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
INFLOWS (per period of time)
UNEMPLOYMENT
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
From outside the labour force
INFLOWS (per period of time)
UNEMPLOYMENT
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
From outside the labour force
•School/college leavers
INFLOWS (per period of time)
UNEMPLOYMENT
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
From outside the labour force
•School/college leavers •People returning to the labour force (e.g. after raising children)
INFLOWS (per period of time)
UNEMPLOYMENT
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
From outside the labour force
•School/college leavers •People returning to the labour force (e.g. after raising children)
INFLOWS (per period of time)
UNEMPLOYMENT To jobs OUTFLOWS (per period of time)
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
From outside the labour force
•School/college leavers •People returning to the labour force (e.g. after raising children)
INFLOWS (per period of time)
UNEMPLOYMENT To jobs OUTFLOWS (per period of time)
•People taking new jobs
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
From outside the labour force
•School/college leavers •People returning to the labour force (e.g. after raising children)
INFLOWS (per period of time)
UNEMPLOYMENT To jobs OUTFLOWS (per period of time)
•People taking new jobs •People returning to old jobs who had been temporarily laid off
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
From outside the labour force
•School/college leavers •People returning to the labour force (e.g. after raising children)
INFLOWS (per period of time)
UNEMPLOYMENT To jobs OUTFLOWS (per period of time) To outside the labour force
•People taking new jobs •People returning to old jobs who had been temporarily laid off
•People who have become disheartened and give up looking for a job
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
From outside the labour force
•School/college leavers •People returning to the labour force (e.g. after raising children)
INFLOWS (per period of time)
UNEMPLOYMENT To jobs OUTFLOWS (per period of time) To outside the labour force
•People taking new jobs •People returning to old jobs who had been temporarily laid off
•People who have become disheartened and give up looking for a job •People who have reached retirement age
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
From outside the labour force
•School/college leavers •People returning to the labour force (e.g. after raising children)
INFLOWS (per period of time)
UNEMPLOYMENT To jobs OUTFLOWS (per period of time) To outside the labour force
•People taking new jobs •People returning to old jobs who had been temporarily laid off
•People who have become disheartened and give up looking for a job •People who have reached retirement age •People who temporarily withdraw from labour force (e.g. to raise a family)
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
From outside the labour force
•School/college leavers •People returning to the labour force (e.g. after raising children)
INFLOWS (per period of time)
UNEMPLOYMENT To jobs OUTFLOWS (per period of time) To outside the labour force
•People taking new jobs •People returning to old jobs who had been temporarily laid off
•People who have become disheartened and give up looking for a job •People who have reached retirement age •People who temporarily withdraw from labour force (e.g. to raise a family) •People who emigrate
Flows into and out of unemployment
From jobs
•People made redundant •People sacked •People temporarily laid off •People resigning
From outside the labour force
•School/college leavers •People returning to the labour force (e.g. after raising children)
INFLOWS (per period of time)
UNEMPLOYMENT To jobs OUTFLOWS (per period of time) To outside the labour force
•People taking new jobs •People returning to old jobs who had been temporarily laid off
•People who have become disheartened and give up looking for a job •People who have reached retirement age •People who temporarily withdraw from labour force (e.g. to raise a family) •People who emigrate •People who die
Unemployment
• Unemployment and the labour market
– the aggregate demand and supply of labour
– equilibrium in the model
Aggregate demand and supply of labour
ASL
Average (real) wage rate
We
ADL
O Qe
No. of workers
Unemployment
• Unemployment and the labour market
– the aggregate demand and supply of labour
– equilibrium in the model
– disequilibrium unemployment
Disequilibrium unemployment
ASL
Average (real) wage rate
B W2
A
We
ADL
O Q
2
Q
No. of workers
1
Unemployment
• Unemployment and the labour market
– the aggregate demand and supply of labour – equilibrium in the model – disequilibrium unemployment – equilibrium unemployment
Equilibrium unemployment
ASL
Average (real) wage rate
e
We
ADL
O Qe
No. of workers
Equilibrium unemployment
ASL N
Average (real) wage rate
e
We
d
ADL
O Qe Q2
No. of workers
Equilibrium and disequilibrium unemployment
ASL
Average (real) wage rate
e
We
ADL
O Qe
No. of workers
Equilibrium and disequilibrium unemployment
ASL
Average (real) wage rate
Disequilibrium unemployment
b W2 e
a
We
ADL
O
No. of workers
Equilibrium and disequilibrium unemployment
ASL
Average (real) wage rate
Disequilibrium unemployment
N
b W2 e
a
c
We
Equilibrium unemployment
ADL
O
No. of workers
Unemployment
• Disequilibrium unemployment
– real-wage (classical) unemployment
– demand-deficient (cyclical) unemployment
– unemployment arising from a growth in the labour supply
Unemployment
• Equilibrium unemployment
– frictional (search) unemployment – structural unemployment
• changing pattern of demand
• technological unemployment • regional unemployment
– seasonal unemployment
Aggregate Demand and Supply
• The aggregate demand curve
Aggregate demand and aggregate supply
Price level
AD
O
National output
Aggregate Demand and Supply
• The aggregate demand curve
– Why aggregate demand curves slope downwards
• import effect
Aggregate demand and aggregate supply
Price level
AD
O
National output
Aggregate Demand and Supply
• The aggregate demand curve
– Why aggregate demand curves slope downwards
• import effect • interest-rate effect
Aggregate demand and aggregate supply
Price level
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
Aggregate demand and aggregate supply
Price level
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
Aggregate demand and aggregate supply
AS
Price level
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 aggregate supply curves generally slope upwards
Aggregate demand and aggregate supply
AS
Price level
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 aggregate supply curves generally slope upwards
• Equilibrium
Aggregate demand and aggregate supply
AS
Price level
Pe
AD
O
National output
Aggregate demand and aggregate supply
AS
Price level
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
Inflation
• Defining inflation
• The costs of inflation
– redistribution
– uncertainty
– balance of payments
– resources used to cope with inflation
• Experience of inflation since 1965
Inflation
• Types of inflation
– demand pull
Demand-pull inflation
AS
Price level
P1
AD1
O Q1
National output
Demand-pull inflation
AS
Price level
P1
AD2 AD1
O Q1
National output
Demand-pull inflation
AS
Price level
P2
P1
AD2 AD1
O Q1 Q2
National output
Inflation
• Types of inflation
– demand pull – cost push
Inflation
• Types of inflation
– demand pull – cost push
• wage push
Inflation
• Types of inflation
– demand pull – cost push
• wage push • profit push
Inflation
• Types of inflation
– demand pull – cost push
• wage push • profit push • import-price push
Cost-push inflation
AS1
Price level
P1
AD
O Q1
National output
Cost-push inflation
AS2 AS1
Price level
P1
AD
O Q1
National output
Cost-push inflation
AS2 AS1
Price level
P2
P1
AD
O Q2 Q1
National output
Inflation
• Types of inflation
– demand pull
– cost push
• wage push
• profit push • import-price push
– the interaction of demand-pull and costpush inflation
The interaction of demand-pull and cost-push inflation
AS1
Price level
P1
AD1
O
National output
The interaction of demand-pull and cost-push inflation
AS2
AS1
Price level
P2
P1
AD2 AD1
O
National output
The interaction of demand-pull and cost-push inflation
AS3AS
2
AS1
Price level
P3
P2
P1
AD3 AD2 AD1
O
National output
Inflation
• Types of inflation
– demand pull – cost push
• wage push • profit push • import-price push
– the interaction of demand-pull and costpush inflation – structural (demand shift)
Inflation
• Types of inflation
– demand pull – cost push
• wage push • profit push • import-price push
– the interaction of demand-pull and costpush inflation – structural (demand shift) – expectations and inflation
Inflation
• Policies to tackle inflation
– demand-side policies – supply-side policies
doc_238047513.pptx