© the mcgraw-hill companies, 2008 chapter 19 introduction to macroeconomics david begg, stanley...
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©The McGraw-Hill Companies, 2008
Chapter 19Introduction to macroeconomics
David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 9th Edition, McGraw-Hill, 2008
PowerPoint presentation by Alex Tackie and Damian Ward
©The McGraw-Hill Companies, 2008
Macroeconomics is ...
• the study of the economy as a whole• it deals with broad aggregates• but uses the same style of thinking
about economic issues as in microeconomics.
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Some key issues in macroeconomics
• Inflation– the rate of change of the general price level
• Unemployment– a measure of the number of people looking for
work, but who are without jobs
• Output– real gross national product (GNP) measures total
income of an economy• it is closely related to the economy's total output
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More key issues in macroeconomics
• Economic growth– increases in real GNP, an indication of
the expansion of the economy’s total output
• Macroeconomic policy– a variety of policy measures used by the
government to affect the overall performance of the economy
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Inflation in Turkey2003-2011
5Source: TEPAV
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Inflation in UK, USA and Germany 1960 - 2008
0
2
4
6
8
10
12
14
16
Annual %
1960-73 1973-81 1981-90 1990-01 2001-08
UK
USA
Germany
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Unemployment in Turkey1988-2011
7
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Unemploymentin UK, USA and Germany
0
2
4
6
8
10
% p
.a.
1960-73 1973-81 1981-90 1990-01 2001-08
UK USA Germany
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Economic Growth in Turkey
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Economic Growth in the World
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The Sectoral Division of GDP in Turkey
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Economic growthin UK, USA and Germany
0
1
2
3
4
5
% p
.a.
1960-73 1973-81 1981-90 1990-01 2001-08
UK USA Germany
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Circular Flow Diagram
• Circular Flow Diagram shows how the resources and products flow between households, firms and the government.
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The Circular-Flow Diagram
• Firms– Produce and sell goods and services– Hire and use factors of production
• Households– Buy and consume goods and services– Own and sell factors of production
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The Circular-Flow Diagram
• Markets for Goods and Services– Firms sell– Households buy
• Markets for Factors of Production– Households sell– Firms buy
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The Circular-Flow Diagram
• Factors of Production– Inputs used to produce goods and
services– Land, labor, and capital
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The circular flow of income, expenditure and output
Y
Households Firms
C + I
I
CS
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Circular Flow Diagram
18
Hosehold Firms
Factoral Income (Y)= 7000
Factors of Production
Savings (S)= 2000
Consumption (C)= 5000
Goods and ServiesInvestment (I)
= 2000
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Closed Economy without Government
Y=C+I• Households earn 7000 because they own factors of
production • They spend 5000 and save 2000• So,
– Y= C+S• The savings are used for investment• So,
– S = I is the case. – Y = C+ I– In other words, the output (Y) can be used for consumtion
(C) and investment (I).
19
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Investment and Savings
• Investment (I), is the spending for acquiring newly produced physical capital. – Buying an old factory is not an investment for
the economy.• Savings (S), household income minus the
consumption• If the savings are not under the pillow
then, S = I is always the case.
20
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Gross Domestic Product• The market value of final goods and services that
are produced in a country within a specified time by the residents of a country.
• Final goods and services: We have to exclude the intermediate products in order not to have double counting problem.
• Value added: The increase in value at the end of the production process.
21
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Examples• Ice-cream is a final good if it is consumed by the
households.
• Steel is an intermediate good because it will be used for industries such as auto sector in the later stages.
• The stocks are counted as final good.
• Machinary is a final good because the firms are the final users for these products.
22
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Adding Goverment into the Circular Flow Diagram
• What happens if we add government to the circular flow diagram– The government collects indirect taxes from
consumption and direct taxes from income and uses for government purchases and transfer payments.
• Indirect taxes: Te
• Direct taxes: Td
• Government expenditure: G• Transfers: B
23
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Government in the circular flow
Y
C + I + G
I
CS
Households FirmsGovernment
C + I + G - Te
Te
G
B - Td
Y + B - Td
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Adding the foreign sector
• To incorporate the foreign sector into the circular flow
• we must recognise that residents of a country will buy imports from abroad
• and that domestic firms will sell (export) goods and services abroad.
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GDP and GNP
• Gross domestic product (GDP)– measures the output produced by
factors of production located in the domestic economy
• Gross national product (GNP)– measures the total income earned by
domestic citizens• GNP = GDP + net income from abroad
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Three measures of national output
• Expenditure– the sum of expenditures in the economy– Y = C + I + G + X - Z
• Income– the sum of incomes paid for factor services– wages, profits, etc.
• Output– the sum of output (value added) produced
in the economy
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What GNP does and does not measure
• Some care is needed:– to distinguish between real and nominal
measurements– to take account of population changes– to remember that GNP is not a
comprehensive measure of everything that contributes to economic welfare
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