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Chapter 19 Introduction 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. ©The McGraw-Hill Companies, 2008 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 ©The McGraw-Hill Companies, 2008 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 ©The McGraw-Hill Companies, 2008 Inflation in Turkey 2003-2011 Inflation 20 18 16 14 12 10 8 6 4 2 0 2003 Source: TEPAV 2004 2005 2006 2007 2008 2009 5 2010 2011 ©The McGraw-Hill Companies, 2008 Inflation in UK, USA and Germany 1960 - 2008 16 14 12 10 UK USA Germany Annual % 8 6 4 2 0 1960-73 1973-81 1981-90 1990-01 2001-08 ©The McGraw-Hill Companies, 2008 Unemployment in Turkey 1988-2011 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 7 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 0.00 ©The McGraw-Hill Companies, 2008 Unemployment in UK, USA and Germany 10 % p.a. 8 6 4 2 0 1960-73 1973-81 UK 1981-90 USA 1990-01 2001-08 Germany ©The McGraw-Hill Companies, 2008 Economic Growth in Turkey Growth (%) 12 10 9.4 9.2 8.5 8.4 8 6.9 6 6.2 5.3 4.7 4 2 0.7 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -2 -4 -4.8 -6 ©The McGraw-Hill Companies, 2008 Economic Growth in the World Growth (%) 8 7.5 7 6.2 6 5 5.3 4 3 6 5.7 4.1 3.9 3.5 3.2 2 2 1.6 1.4 1 0 2010 2011 Dünya Gelişmiş Ülkeler 2012* 2013* Gelişmekte Olan Ülkeler 10 ©The McGraw-Hill Companies, 2008 The Sectoral Division of GDP in Turkey 25.0 20.0 15.0 2000 2010 10.0 5.0 0.0 ©The McGraw-Hill Companies, 2008 Economic growth in UK, USA and Germany 5 % p.a. 4 3 2 1 0 1960-73 1973-81 UK 1981-90 USA 1990-01 2001-08 Germany ©The McGraw-Hill Companies, 2008 Circular Flow Diagram • Circular Flow Diagram shows how the resources and products flow between households, firms and the government. ©The McGraw-Hill Companies, 2008 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 ©The McGraw-Hill Companies, 2008 The Circular-Flow Diagram • Markets for Goods and Services – Firms sell – Households buy • Markets for Factors of Production – Households sell – Firms buy ©The McGraw-Hill Companies, 2008 The Circular-Flow Diagram • Factors of Production – Inputs used to produce goods and services – Land, labor, and capital ©The McGraw-Hill Companies, 2008 The circular flow of income, expenditure and output I C S C+I Households Firms Y ©The McGraw-Hill Companies, 2008 Circular Flow Diagram Consumption (C) = 5000 Savings (S) = 2000 Investment (I) = 2000 Goods and Servies Hosehold Firms Factors of Production Factoral Income (Y) = 7000 18 ©The McGraw-Hill Companies, 2008 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 ©The McGraw-Hill Companies, 2008 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 ©The McGraw-Hill Companies, 2008 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 ©The McGraw-Hill Companies, 2008 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 ©The McGraw-Hill Companies, 2008 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 ©The McGraw-Hill Companies, 2008 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 ©The McGraw-Hill Companies, 2008 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. ©The McGraw-Hill Companies, 2008 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 ©The McGraw-Hill Companies, 2008 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 ©The McGraw-Hill Companies, 2008 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 ©The McGraw-Hill Companies, 2008