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Macroeconomics
The Income and Output of Nations
ECONOMIC AGENTS
Households
FIRMS
Government
1
Circular Flow Between Firms and Households
(real resources)
Goods and services
Households
Firms
FOP Input:
Household includes workers,
managers, entrepreneurs etc.
i.e. people
2
Circular Flow Between Firms and Households
(corresponding flow of payments)
Spending on
goods and services
Households
Firms
FOP incomes
3
Circular Flow Between Firms and Households
Spending on
goods and services
Goods and services
Households
Firms
Services of
productive factors
Factor incomes
4
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
• All three approaches are should give you the
same final figure for national output
5
Circular Flow Between Firms and Households
Spending on
Expenditure
goods and services
GoodsOutput
and services
Households
Firms
Services of
productive factors
Income
Factor
incomes
6
Measuring Output
• Total value added
– is the economy’s net output after deducting goods
used during production
– to avoid double counting
– E.g. egg, milk, flour used for making muffins.
MUFFINS. Final Good.
• Gross domestic product (GDP)
– measures the output produced by factors of
production located in the domestic economy over
a period of time, usually a year.
7
Leakages from the Circular Flow
• Leakages
(in terms of flow of payment)
– money paid to the households but not
returned to firm
– Or flow of payments that started from
firms but did not return back to firms
– e.g. household savings, net taxes and
imports
8
Circular Flow Between Firms and Households
(corresponding flow of payments)
Spending on
goods and services
Leakages
Households
Firms
Factor incomes
9
Injections into the Circular Flow
• Injections
(in terms of flow of payment)
– are revenue for firms not from sales to
household
– e.g. investment by firms, government
purchases and exports
10
Circular Flow Between Firms and Households
(corresponding flow of payments)
Spending on
goods and services
Injections
Households
Firms
Factor incomes
11
The Circular Flow of Income with
Government and Foreign Trade
• Government
– spends money on goods & services (G)
– finances welfare payments, i.e. transfer payments (B)
this spending is financed by taxes (T)
Foreign Sector:
• Export (X)
– made at local economy but sold abroad
• Import (M)
– made abroad and bought at local economy.
12
The Circular Flow of Income in Symbols
• Domestic Output (GDP) is either
–
–
–
–
Consumed (C)
Invested (I) (INCREASE IN STOCK OF CAPITAL)
Bought by the Government (G)
Bought by the foreigners, net exports (X-M)
• Factor Incomes are spent on
– Consumption (C)
– Saving (S)
– Paying taxes net of benefits (T-B)
13
The Circular Flow of Income in Symbols
GDP = C + I + G + (X – M)
Factor Income = C + S + (T – B)
Since every things produced in the economy
generates equivalent factor income
Domestic Output (GDP) = Factor Incomes
14
The Circular Flow of Income in Symbols
Domestic Output
Factor Incomes
C + I + G + (X – M) = C + S + (T – B)
C: Consumption
I: Investment
G: Government
Expenditure
X-M: Net exports
C: Consumed
S: Savings
T-B: Taxes
Net of Benefits
15
The Circular Flow of Income in Symbols
Domestic Output
Factor Incomes
C + I + G + (X – M) = C + S + (T – B)
rearrange
I+G+X =
Total Injections
S + (T – B) + M
Total Leakages
16
Or we can look at it another way
17
NATIONAL INCOME (GDP)
•
•
•
•
•
Y= National Income
C = Consumption
I = Investment
G = Government Expenditure
(X-M) =Net Exports
GDP = C + I + G + (X – M)
18
IF ALL THAT IS PRODUCED, IS CONSUMED, THEN Y = C.
• However all the revenue coming from national production
is not used for consumption: ©
– T
– S
– M
• Also the national production is not consumed by national
local households. © Part of it goes to: Foreign countries,
Government buys part of it and Some of the production
is used for producing other goods: Investment.
– X
– G
– I
Therefore…
I+G+X =
Total Injections
S + (T – B) + M
Total Leakages
19
GDP, GNP,
• Gross domestic product (GDP)
– measures the output produced by factors of
production located in the domestic economy over
a period of time, usually a year.
20
GNP
• Gross National Product (GNP)
– total income of citizens wherever it is earned
= GDP + Net Property Income (NPI)
IF GDP > GNP the citizens of the local economy
are producing less than the citizens from abroad.
It means that citizens from abroad in the local
economy plus loclas make the local economy GDP
bigger than its Citizens abroad and in the local
economy together.
21
NNP
Depreciation: wear and tear of capital stock
Gross: DOES NOT TAKE IN ACCOUNT DEPRECIATION.
Only the increase in K stock.
• Net National Income
= GNP – Depreciation
22
GDP, GNP, Depreciation
• Nominal Gross National Product
– Measures national output at current prices
= value of all goods at current prices
• Real Gross National Product
– Measures output at base year prices
e.g. value of today's national output at 1995
prices
– Allows us eliminate the effect of price changes and
see how real output evolves over time
23
TOTAL GDP enough?
• GDP 1: 10,000,000$
• Population 1: 5, millions
– Gdp / capita: 2$
• GDP 2: 10,000,000$
• Pop 2: 700,000
– Gdp/capita: 14.2$
• GDP 3: 50,000,000
• Pop 3: 28 millions
– Gdp/capita: 1.78$
24
GDP/capita in different countries
25
GDP compared
26
What’s wrong with this chart?
27
GDP Composition
28
GDP per capita
Who’s the richest?
29
GDP AND GDP/Capita WORLD
30
Income per capita
31
GNP per capita growth rates
32
REAL GDP PER CAPITA
33
National Income and Firm Sales
34
TOTAL GDP is ok, but not enough…
GDP measures production in an
economy…HOWEVER:
• Does NOT take in account other variables like:
–
–
–
–
Does not separate K or C goods.
Underground economy is not taken in account
Externalities are not taken in account.
Self consumption activities or household activities
are not taken in account.
– Other issues which reflect standard of living.
Education, Health, environment, security, freedom,
discrimination, etc…
– Income distribution (inequality)
35
Unequal distribution of Income
36
THEREFORE: DEVELOPMENT INDEXES ARE
NEEDED TO EXPLAIN WELL BEING IN AN
ECONOMY.
37
World dev
Growth and Development
• Millennium Development Goals
38
Growth and Development
WHY COUNTRIES GROW?
• Technology= increase in productivity of
other factors.
40
Technology and Mg productivity of
labour
41
Economic Growth
• Growth: An increase in
an economy's ability to
produce goods and
services which brings
about a rise in
standards of living.
• The increase over time
in the capacity of an
economy to produce
goods and services and
(ideally) to improve the
well-being of its
citizens.
42
Development
• Economic Development: The process of
improving the quality of human life through
increasing per capita income, reducing poverty,
and enhancing individual economic
opportunities.
•Economic Development: is
typically measured in terms
of jobs and income, but it
also includes improvements
in human development,
education, health, choice,
and environmental
sustainability
The power of one: hyperlink
43
DEVELOPMENT
44
HOWEVER: Difficulties to measure
development
•
•
•
•
Subjective Variables (culture and religion?)
Difficult to measure
Not available statistics
Different indicators to compare development
between countries and Institutions. (U.N.,
WB, WTO, IMF, etc)
• LDC, MDC, etc…
• Read pp 30, 31, 32 green book
45
World Bank Income
Classification:
• Income group: Economies are divided
according to 2006 GNI per capita.
• The groups are:
– low income: $905 or less;
– lower middle income: $906 - $3,595;
– upper middle income: $3,596 - $11,115;
and
– high income: $11,116 or more.
46
World: GNP per capita
Countries Classifications
47
U.N. HDI Classification
48