Macroeconomics
2
What is macroeconomics?
What are macroeconomic goals?
How is national income measured?
How can economic growth be achieved?
What is macroeconomics?
Macroeconomics is the study of a national economy.
3
4
Macroeconom
ic Goals
5
National Income
Two Sector Circular Flow of Income
6
Wages, Rent and Profits(Y)
Factors of Production
Expenditure on Goods and Services(E)
Good and Services = Output (O)
Households
FirmsE = O = Y
Monetary Flow
Real Flow
Four Sector Circular Flow of Income
7
Expenditure
Income
Households
Firms
Leakages (L)
Saving (S)
Taxes(T)
Imports (M)
Injections (J)
Exports(X)
Investments(I)
GovernmentSpending (G)
O = E = Y Sum J = Sum L
Measuring National Income
8
Wages, Rent and Profits
Factors of Production
Expenditure on Goods and Services
Good and Services
Households
Firms
Output Method Income Method
Expenditure Method
9 How is national income measured?
10 How is national output measured?
11How is national expenditure measured?
12 What is GDP?
13 GDP
GDP = Gross Domestic Product = Total Value of all Spending in an Economy = The Total Value of all final Goods and Services in an Economy regardless of who owns the productive assets.
GDP = C + I + G + (X – M)
14 GNP
GNP = Gross National Product = Total Income Earned by a nation’s factors of production regardless of where the assets are located
15 Real GDP
Real GDP = Nominal GDP adjusted for inflation
16 Calculating Real GDP
Real GDP = Nominal GDP of year measuredGDP Deflator
X 100
17 The Uses of National Statistics
18 Limitations of the Data
19
Introduction to Development
What is economic development?
Economic Development is a multidimensional concept that includes poverty reduction, provision of education, health care and law and order, civil liberties and civic participation.
20
Why GDP fails to accurately measure welfare21
Why GDP may understate improvements in welfare22
Why GDP may overstate welfare23
How can development be measured?
GDP per capita
Human Development Index
Aims to stress the human dimension of economic growth
24
How can development be measured?25
How is the HDI determined?26
27How can development be measured?
Developing and Developed 28
How can development be measured?
Important Indicators of development
① Infant mortality rate
② Maternal mortality ratio
③ Enrolment in each level of education
④ Literacy
⑤ Internet users per 1000
29
30
Macroeconomic Models
What is aggregate demand (AD)?
Aggregate Demand is the aggregate (total) spending on goods and service in a period of time at a given price level.
31
Click icon to add picture
32
33 What are the components of AD?
C = all household consumption on durables, non-durables and services
I = firm’s replacement investment (spending on capital to maintain productivity) or induced investment to increase production
G = all government spending
X-M = spending by foreigners on exports less domestic spending on imports
What causes shifts in AD?34
What causes Changes in
Consumption?
35
AD AD
ADAD
What causes Changes in Consumption?
36
AD
AD AD
AD
What causes Changes in Consumption?
37
AD
AD AD
AD
What causes Changes in Investment?
38
AD
AD
Demand for investment funds?39
What causes Changes in Investment?
40
AD
AD AD
AD
What causes Changes in Investment?
41
AD
ADAD
AD
What causes Changes in Investment?
42
AD
AD
What causes Changes in Government Spending?
43
AD
ADAD
AD
What causes Changes in Export and
iMport spending?
44
AD
AD
What causes Changes in Export and
iMport spending?
45
AD
ADAD
AD
What is aggregate supply (AS)?
Aggregate (total) Supply is amount of goods and services that all industries will produce at a given price level.
46
What is aggregate supply in the short run (SRAS)?47
What are the components of AS?48
What causes shifts in SRAS?49
What causes shifts in SRAS?
50
AS
AS AS
AS
What causes shifts in SRAS?
51
ASAS
ASAS
What causes supply shocks?
52
AS
AS
Macroeconomic Equilibrium53
Shifts in AD54
Shifts in SRAS55
The Business Cycle
Fluctuations in the growth of real output, consisting of periods of expansion and contraction called business cycles or trade cycles.
56
Business Cycle57
Business Cycle: Expansion
58
Business Cycle: Peak
59
Business Cycle: Contraction
60
Business Cycle: Trough
61
Relationship between real GDP and Employment
62
Using Diagrams to Illustrate Macroeconomic Goals
63
Using Diagrams to Illustrate Macroeconomic Goals
64
Changes in SR Equilibrium 65
Changes in AD 66
Changes in SRAS 67
Economic Scenarios 68
Deflationary (recessionary) gap 69
Recession
A recession is when the economy experiences two consecutive quarters of falling GDP.
70
Inflationary gap 71
Full employment level of output 72
Causes of Business Cycle 73
Changes in AD 74
Changes in AS 75
76
Wh
at is th
e n
eo
classica
l p
ersp
ective
?
77 The Neoclassical LRAS
78Neoclassical (Free Market) LRAS
LRAS perfectly inelastic at Full Employment Level of Output (Ymax)Potential Output = Quantity and Quality of FOPs not Price
79 Why is the LRAS vertical?
80Implications of the neoclassical LRAS?
81Long-run equilibrium
82Long-run equilibrium and Decline in AD
83Return to Long-run equilibrium
84Long-run equilibrium
85Long-run equilibrium and Increase in AD
86Return to Long-run equilibrium
87
What is the Keynesian perspective?
88 The Keynesian SR/LRAS?
89 Keynesian SR/LRAS
Segment 1: Spare capacity in the economy, LRAS perfectly elastic
90 Keynesian SR/LRAS
Keynes argued that as there is nothing inherent in the economy to move the SR into the LR, then SRAS = LRAS
NB
In diagrams taking a Keynesian you may see the AS curve labeled Keynesian AS or simply LRAS as long as the diagram’s title makes clear which perspective is being adopted
91
Inflationary Gap in the Keynesian Perspective
92
Full Employment Equilibrium in the Keynesian Perspective
93
Economic Growth: Improved Quantity & Quality of FOPs
94
Economic Growth: Neoclassical Perspective
95
Economic Growth: Keynesian Perspective
96
Demand-side and Supply-side policies
Policy Alternatives to Manage the Economy97
98
Expansionary Policies (in recession)
99Contractionary Policies (in inflation)
100Strengths of Fiscal Policy
101Weaknesses of Fiscal Policy
102Strengths of Monetary Policy
103Weaknesses of Monetary Policy
The Neoclassical/Monetarist Challenge
Argument that discretionary fiscal polices that try to stabilize the economy are so flawed that they actually cause instability
Alternative policies
1. Ensure steady supply of money
2. Ensure price and wage flexibility
3. Focus on supply-side policies to achieve economic growth
104
Supply-side Policies
105
Market-orientated Policies
106
Market-orientated Supply-side Policies: Objectives107
108
Reduce Government Sector: Pros and Cons109
110
Improving incentives : Pros and Cons111
112
Make labor more responsive to supply and demand : Pros and Cons
113
114
Government policies to improve industry: Pros and Cons
115
Shifting the SRAS and the LRAS in the AS-AD Model116
The multiplier, accelerator and crowding-out effect
HL Topics
117
The Multiplier Effect118
119
Marginal Propensity
1
Example of the Multiplier in Effect
Initial Spending by government $100m
2nd Round of Spending $60m
3rd Round of Spending $36m
4th Round of Spending $21.6m
5th Round of Spending $12.96m
And So On
Last Round $0.01m
Total Spending, including initial spending by government
$249.99m
120
Assumption 60% of additional income spent on Consumption (MPC = 0.6)
The Multiplier = 1/1-MPC
The Multiplier Effect
121
The Accelerator Theory & the Combined multiplier/accelerator effect
Argues that small changes in GDP produces larger changes in investment spending.
These fluctuations interact with the Multiplier effect to increase the momentum of business cycle.
122
Crowding-out Effect123
Crowding-out Effect
124
Crowding-out Effect
125
126
Unemployment and Inflation
Unem
ployment
127
128
129
Economy at Potential
130
Types of Unemployment
131
Keynesian Remedy for Unemployment During a Recession
132
Neoclassical Remedy for Unemployment During a Recession
133
Real Wage Unemployment
134
Eliminating Cyclical (Demand-deficient) Unemployment
135
Inflation and Deflation136
Inflation & D
eflation
137
Demand-pull Inflation
138
Cost-push Inflation
139
140
Stakeholders and Inflation
141
142
“Good” Deflation
143
Macroeconomics
Section 3.5
HL Topics
Measuring Inflation
The Phillips Curve
NRU & NAIRU
144
Measuring Inflation
The consumer price index (CPI) compares the value of a basket of goods and services in one year with a same basket in the base year.
145
Problems Measuring Inflation146
The Phillips Curve147
NRU = NAIRU
If governments avoid demand-side expansionary policies Non-accelerating inflation rate of unemployment is achieved (NAIRU)
148
Long-run Phillips Curve149
Phillips Curve
150
Phillips Curve
151
No-classical challenge to the Phillips Curve
a = Labor Market at equilibrium
6% = NRU
Wages set to rise by at least 2% as workers expect this rate of inflation
152
LR Phillips Curve
If expansionary policies adopted, inflation would increase to 4% or more. Real wages have fallen and firms hire additional labor.
153
LR Phillips CurveUnemployment is now below NRU at 4%. (b)Workers have fallen for the “money illusion” and slow to realize that real wages have fallen because inflation is actually over 4%.
154
LR Phillips CurveOnce workers realize real wages have fallen they will demand at least a 4% pay rise. Real wages will return to previous levels and firm will fire workers.Unemployment has returned to (c)
155
LR Phillips CurveAny attempt to to increase AD will only result in temporary changes to unemployment but increasingly high rates of inflation
156
LR Phillips CurveFriedman argued that no trade off exists if governments do not use demand side policies.
157
158
Income Distribution
Income Distribution and Equity
Horizontal Equity = people should be treated the same e.g. people who have the same income should pay the same tax
Vertical Equity = treating people differently to achieve greater fairness e.g. people on low incomes pay less tax than people on high incomes
159
160
161
Progressive, Proportional and Regressive Taxation
Progressive: as income increases, the fraction paid in tax increasesProportional: as income increases the fraction paid in taxes remains constantRegressive: as income increases, the fraction paid in taxes decreases
162
Progressive, Proportional and Regressive Taxation
Income $ Proportional Tax Rate
Tax Paid
Progressive Tax Rate
Tax paid Regressive Tax
Tax Paid
10,000 15% 1500 15% 1500 15% 1500
50,000 15% 6500 20% 10000 10% 5000
100,000 15% 15000 40% 40000 5% 5000
163
164
Lorenz Curve
Perfect income equality
Inequality of income
165
Calculating G
ini Coefficient
Gini Coefficient = A/A+B
166
A
B
Gini Coefficient
Gini Coefficient = areas between diagonal and Lorenz Curve/entire area under diagonal
Values closer to 0 = greater income equality
Values closer to 1 = greater income inequality
167
Laffer Curve (HL Extension)168
Laffer Curve
169
170 Activity
Select one of the OECD economies to study in detail over Section 3
Undertake research to find the following:
1.Real GDP for the last decade
2.Real GDP per Capita for the last decade
3.Real GDP growth for the last decade
What conclusions can you draw?
171 Activity
Visit www.nationmaster.com or any reputable site and gather data on the various measure of development for your OECD country of focus and compare it with the developing nation you chose early in the course.
Typical Examination Questions
172
These questions focus on Measuring National Income and Macroeconomics Models.
1. Explain the possible limitations of using GDP as a measure to
compare welfare between countries.
2. Using the circular flow of income diagram, explain the link between
saving and investment.
3. Use AS/AD diagrams to explain the causes of inflation (or deflation).
4. Identify the components of aggregate demand (or aggregate supply)
and briefly explain factors which might determine these components.
5. Evaluate the likely impact on an economy of a substantial rise (or fall)
in the level of interest rates (or other components of AD)
Typical Examination Questions
These questions focus on inflation and deflation:
1. What are the problems associated with measuring inflation?
2. Explain the possible causes of a rise (or fall) in the rate of inflation in
an economy.
3. Evaluate the likely effects of a rising (or falling) rate of inflation on the
performance of an economy.
4. Explain the costs of inflation and deflation.
5. Evaluate the view that governments should make the control of
inflation their highest priority
6. Evaluate the possible impact on economic performance that may
result from a government decision to bring inflation under control.
173
Typical Examination Questions
These questions focus on unemployment:
1. Explain the different types of unemployment.
2. Evaluate polices aimed at achieving full employment in an economy.
3. Explain the costs of unemployment.
4. Discuss the reasons why government find the goal of full employment difficult to achieve.
174
Typical Examination Questions
These questions focus on monetary and fiscal policy:
1. Discuss the strengths and weaknesses of demand-side policies.
2. Discuss the strengths and weakness of supply-side policies.
3. Explain the purpose of various demand-side (or supply-side) policies.
175
Typical Examination Questions
These questions focus on income distribution:
1. With the use of examples, explain the difference between a progressive tax and a regressive tax.
2. With the use of examples, explain the difference between direct and indirect taxes.
3. Explain the possible impact on the distribution of income of a government shifting its main source of tax revenue from progressive direct taxes to regressive indirect taxes.
4. Evaluate the methods government use to redistribute income in an economy.
176
Typical HL Examination Questions
In addition to the questions above, HL students need to prepare for the following:
1. Explain the relationship between the Lorenz Curve and the Gini coefficient.
2. Explain how increasing government spending can lead to crowding out.
3. Use the Phillips curve to explain the concepts of Natural Rate of Unemployment and outline its usefulness.
4. Explain the multiplier and the accelerator effects.
5. Use the Laffer Curve to explain the likely impact of progressive and regressive tax systems.
177
178 On-Line Resources (1)
1. Keynes and Hayek Rap
2. Nationmater is a massive central data source and a handy way to graphically compare nations that compiles data from such sources as the CIA World Factbook, UN, and OECD.
3. CIA Factbook The World Factbook provides information on the history, people, government, economy, geography, communications, transportation, military, and transnational issues for 266 world entities.
4. Gapminder, an excellent way to visual information
179 On-Line Resources (2)
5. International Monetary Fund also provides international data.
6. National Council on Economics Education is another excellent source of information. The organization also has worksheets to help student analyze current GDP data.
7. The Economist Debates
8. Commanding Heights
9. Triple A Learning Economics Blog
Top Related