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Introduction to macroeconomics Macroeconomics is Macroeconomics is ... • the study of the economy as a whole • it deals with broad aggregates • but but uses the same style of thinking about uses the same style of thinking about economic issues as in microeconomics. 20.1 Some key issues in macroeconomics Some key issues in macroeconomics • Inflation – the rate of change of the general price level • Unemployment – aa measure of the number of people looking for work, but measure of the number of people looking for work but who are without jobs • Output O t t – real gross national product (GNP) measures total income of an economy • it is closely related to the economy's total output 20.2 More key issues in macroeconomics More key issues in macroeconomics • Economic growth – increases in real GNP, an indication of the , expansion of the economy’s total output • Macroeconomic policy Macroeconomic policy – a variety of policy measures used by the government to affect the overall performance of ff h ll f f the economy 20.3 Inflation in the UK 1950 99 Inflation in the UK, 1950‐99 30 25 15 10 5 19 90 19 70 0 19 50 %p p.a. 20 Source: Economic Trends Annual Supplement, Labour Market Trends 20.4 Inflation in selected European countries Inflation in selected European countries Germany France Belgium EU Finland UK Spain Italy Portugal Greece 0 1 2 3 4 5 % change 1998 compared with 1997 20.5 Inflation in UK USA and Germany Inflation in UK, USA and Germany 16 14 %p p.a. 12 10 8 6 4 2 0 1960-73 1960 73 1973-81 1973 81 UK USA 1981-90 1981 90 1990-98 1990 98 Germany 20.6 U Unemployment in the UK, 1950‐99 l i h UK 1950 99 14 12 8 6 4 2 19 90 19 70 0 19 50 %p p.a. 10 Source: Economic Trends Annual Supplement, Labour Market Trends 20.7 Unemployment in selected European countries Germany France Belgium EU Finland UK Spain Italy Portugal Greece 0 5 10 15 20 % unemployment (ILO measure) 1998 20.8 Unemployment in UK, USA and Germany 10 %p p.a. 8 6 4 2 0 1960-73 1960 73 1973-81 1973 81 UK USA 1981-90 1981 90 1990-98 1990 98 Germany 20.9 Economic growth in UK, USA and Germany 5 %p p.a. 4 3 2 1 0 1960-73 1960 73 1973-81 1973 81 UK USA 1981-90 1981 90 1990-98 1990 98 Germany 20.10 The circular flow of income, expenditure and output I C S C+I Households Firms Y 20.11 Government in the circular flow Government in the circular flow I C+I+G C S G Households C + I + G - Te Te Government Firms B - Td Y + B - Td Y 20.12 Adding the foreign sector Adding the foreign sector • To incorporate the foreign sector into the circular flow circular flow • we must recognize that residents of a country will buy imports from abroad • and and that domestic firms will sell (export) that domestic firms will sell (export) goods and services abroad. 20.13 GDP and GNP GDP and GNP • Gross domestic product (GDP) – measures the output produced by factors of p p y production located in the domestic economy • Gross national product (GNP) Gross national product (GNP) – measures the total income earned by domestic citizens ii • GNP = GDP + net income from abroad 20.14 Three measures of national output Three measures of national output • Expenditure di – 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. wages profits etc • Output – the sum of output (value added) produced in the economy 20.15 National income accounting: a summary National income accounting: a summary NYA G GNP (and GNI) at market prices I X-Z C NYA Deprec'n Indirect taxes GDP NNP at market at basic National prices prices income Profits,, rents Selfemployment Wages and salaries 20.16 What GNP does and does not measure What GNP does and does not measure • Some care is needed: – to distinguish between real g and nominal measurements – to take account of population changes to take account of population changes – to remember that GNP is not a comprehensive measure of everything that contributes to measure of everything that contributes to economic welfare 20.17