Promoting active learning

1
Aggregate Demand and Supply and Macroeconomic
Problems
2
Macroeconomic Objectives

• Distinction between microeconomics and
  macroeconomics
• The major macroeconomic issues
• economic growth
• unemployment
• inflation
• balance of payments and exchange rates
• balance of payments deficits and surpluses
• exchange rate movements

3
Economic growth (average per annum),
Unemployment (average ), Inflation (average
per annum)
4
Economic growth (average per annum),
Unemployment (average ), Inflation (average
per annum)
5
Economic growth (average per annum),
Unemployment (average ), Inflation (average
per annum)
6
The Circular Flow of Income

• The inner flow

7
The circular flow of income
Firms
Households
8
The Circular Flow of Income

• Withdrawals
• net saving
• net taxes
• import expenditure
• Injections
• investment
• government expenditure
• export expenditure

9
The circular flow of income
INJECTIONS
Consumption of domestically produced goods and
services (Cd)
Factor payments
WITHDRAWALS
10
The Circular Flow of Income

• The relationship between injections and
  withdrawals
• the links between them

11
The circular flow of income
INJECTIONS
Consumption of domestically produced goods and
services (Cd)
Factor payments
WITHDRAWALS
12
The Circular Flow of Income

• The relationship between injections and
  withdrawals
• the links between them
• planned injections may not equal planned
  withdrawals

13
The Circular Flow of Income

• The relationship between injections and
  withdrawals
• the links between them
• planned injections may not equal planned
  withdrawals
• Equilibrium in the circular flow

14
The circular flow of income
INJECTIONS
Consumption of domestically produced goods and
services (Cd)
Factor payments
WITHDRAWALS
15
The Circular Flow of Income

• The relationship between injections and
  withdrawals
• the links between them
• planned injections may not equal planned
  withdrawals
• Equilibrium in the circular flow
• The circular flow and the four macroeconomic
  objectives

16
The circular flow of income
INJECTIONS
Consumption of domestically produced goods and
services (Cd)
Factor payments
WITHDRAWALS
17
Measuring national income

• GDP the measure of national income
• Methods of measuring GDP
• the product approach
• the income approach
• the expenditure approach

18
The circular flow of national income and
expenditure
19
The circular flow of national income and
expenditure
(1) Production
(2) Incomes
(3) Expenditure
20
Measuring national income

• GDP the measure of national income
• Methods of measuring GDP
• the product approach
• the income approach
• the expenditure approach
• The product approach

21
Measuring national income

• GDP the measure of national income
• Methods of measuring GDP
• the product approach
• the income approach
• the expenditure approach
• The product approach
• measuring GVA

22
UK GVA (product-based measure) 2001

Agriculture, forestry and fishing 8 241
m Mining, energy and water supply 41 378
m Manufacturing 153 132 m Construction 47
327 m Wholesale and retail trade repairs 106
766 m Hotels and restaurants 29 359m Transport
and communication 70 252 m Banking, finance,
insurance, etc. 6 667 m Letting of property
209 839 m Public administration and defence
42 096 m Education, health and social work
114 069 m Other services 45 101 m
23
UK GVA (product-based measure) 2001

Agriculture, forestry and fishing 8 241
m Mining, energy and water supply 41 378
m Manufacturing 153 132 m Construction 47
327 m Wholesale and retail trade repairs 106
766 m Hotels and restaurants 29 359m Transport
and communication 70 252 m Banking, finance,
insurance, etc. 6 667 m Letting of property
209 839 m Public administration and defence
42 096 m Education, health and social work
114 069 m Other services 45 101 m Total GVA
874 227 m
24
UK GVA (product-based measure) 2001
0.9 4.7 17.5 5.4 12.2 3.4 8.0 0.8 24.0 4.8
13.0 5.2 100.0
Agriculture, forestry and fishing 8 241
m Mining, energy and water supply 41 378
m Manufacturing 153 132 m Construction 47
327 m Wholesale and retail trade repairs 106
766 m Hotels and restaurants 29 359m Transport
and communication 70 252 m Banking, finance,
insurance, etc. 6 667 m Letting of property
209 839 m Public administration and defence
42 096 m Education, health and social work
114 069 m Other services 45 101 m Total GVA
874 227 m
Percentage of GVA
25
Measuring national income

• GDP the measure of national income
• Methods of measuring GDP
• the product approach
• the income approach
• the expenditure approach
• The product approach
• measuring GVA
• The income approach

26
UK GVA by category of income 2001
Compensation of employees (wages and
salaries) 556 371 m Operating
surplus (gross profit, rent and interest of
firms government and other institutions) 238 625
m Mixed incomes 60 073 m Tax less subsidies on
production (other than those on products)
plus statistical discrepancy 19 158m
27
UK GVA by category of income 2001
Compensation of employees (wages and
salaries) 556 371 m Operating
surplus (gross profit, rent and interest of
firms government and other institutions) 238 625
m Mixed incomes 60 073 m Tax less subsidies on
production (other than those on products)
plus statistical discrepancy 19 158m Total GVA
874 227m
28
UK GVA by category of income 2001
63.6 27.3 6.9 2.2 100.0
Compensation of employees (wages and
salaries) 556 371 m Operating
surplus (gross profit, rent and interest of
firms government and other institutions) 238 625
m Mixed incomes 60 073 m Tax less subsidies on
production (other than those on products)
plus statistical discrepancy 19 158m Total GVA
874 227m
Percentage of GVA
29
Measuring national income

• GDP the measure of national income
• Methods of measuring GDP
• the product approach
• the income approach
• the expenditure approach
• The product approach
• measuring GVA
• The income approach
• From GVA to GDP

30
UK GDP (product-based measure) 2001
GVA (gross value added at basic prices) 874
227m
31
UK GDP (product-based measure) 2001
GVA (gross value added at basic prices) 874
227m plus Taxes on products 120 499m
32
UK GDP (product-based measure) 2001
GVA (gross value added at basic prices) 874
227m plus Taxes on products 120 499m less
Subsidies on products 6 712m
33
UK GDP (product-based measure) 2001
GVA (gross value added at basic prices) 874
227m plus Taxes on products 120 499m less
Subsidies on products 6 712m GDP (at
market prices) 988 014m
34
Measuring national income

• GDP the measure of national income
• Methods of measuring GDP
• the product approach
• the income approach
• the expenditure approach
• The product approach
• measuring GVA
• The income approach
• The expenditure approach

35
UK GDP by category of expenditure, GNY and NNY
2001
million Consumption expenditure of households
and NPISH (C) 655 265 Government final
consumption (G) 190 663 Gross capital formation
(I) 164 048 Exports of goods and services (X) 268
451 less Imports of goods and services (M) ?290
912 Statistical discrepancy 499 Gross domestic
product (GDP) (at market prices) 988 014
36
Measuring national income

• GDP the measure of national income
• Methods of measuring GDP
• the product approach
• the income approach
• the expenditure approach
• The product approach
• measuring GVA
• The income approach
• from GVA to GDP
• From GDP to net national income (NNY)

37
UK GDP by category of expenditure, GNY and NNY
2001
million Consumption expenditure of households
and NPISH (C) 655 265 Government final
consumption (G) 190 663 Gross capital formation
(I) 164 048 Exports of goods and services (X) 268
451 less Imports of goods and services (M) ?290
912 Statistical discrepancy 499 Gross domestic
product (GDP) (at market prices) 988 014 plus Net
income from abroad 5 756 Gross national income
(GNY) 993 770
38
UK GDP by category of expenditure, GNY and NNY
2001
million Consumption expenditure of households
and NPISH (C) 655 265 Government final
consumption (G) 190 663 Gross capital formation
(I) 164 048 Exports of goods and services (X) 268
451 less Imports of goods and services (M) ?290
912 Statistical discrepancy 499 Gross domestic
product (GDP) (at market prices) 988 014 plus Net
income from abroad 5 756 Gross national income
(GNY) 993 770 less Capital consumption
(depreciation) -111 275 Net national income
(NNY) 882 495
39
Measuring national income

• GDP as a measure of social welfare
• benefits of using GDP
• weaknesses
• The Human Development Index (HDI)

40
Human Development Index (HDI) for selected
countries (2000)
41
Human Development Index (HDI) for selected
countries (2000)
42
Human Development Index (HDI) for selected
countries (2000)
43
Human Development Index (HDI) for selected
countries (2000)
44
Human Development Index (HDI) for selected
countries (2000)
45
Human Development Index (HDI) for selected
countries (2000)
46
Human Development Index (HDI) for selected
countries (2000)
47
Human Development Index (HDI) for selected
countries (2000)
48
Human Development Index (HDI) for selected
countries (2000)
49
Growth and the Business Cycle

• Growth in actual and potential growth
• Economic growth and the business cycle
• fluctuations in actual growth

50
The business cycle
National output
O
Time
51
Growth and the Business Cycle

• Growth in actual and potential output
• Economic growth and the business cycle
• fluctuations in actual growth
• the phases of the business cycle

52
The business cycle
Potential output
National output
Actual output
3
4
2
1
O
Time
53
Growth and the Business Cycle

• Growth in actual and potential output
• Economic growth and the business cycle
• fluctuations in actual growth
• the phases of the business cycle
• trend growth

54
The business cycle
Potential output
National output
Actual output
O
Time
55
Growth and the Business Cycle

• Growth in actual and potential growth
• Economic growth and the business cycle
• fluctuations in actual growth
• the phases of the business cycle
• long-term output trend
• the business cycle in practice

56
Growth and the Business Cycle

• Growth in actual and potential growth
• Economic growth and the business cycle
• fluctuations in actual growth
• the phases of the business cycle
• long-term output trend
• the business cycle in practice
• the irregularity of the cycle

57
Growth and the Business Cycle

• Growth in actual and potential growth
• Economic growth and the business cycle
• fluctuations in actual growth
• the phases of the business cycle
• long-term output trend
• the business cycle in practice
• the irregularity of the cycle
• the length of the phases

58
Growth and the Business Cycle

• Growth in actual and potential growth
• Economic growth and the business cycle
• fluctuations in actual growth
• the phases of the business cycle
• long-term output trend
• the business cycle in practice
• the irregularity of the cycle
• the length of the phases
• the magnitude of the phases

59
Growth and the Business Cycle

• Causes of fluctuations in actual growth
• aggregate demand
• aggregate demand relative to potential output
• Actual growth in practice
• experience since 1970

60
Growth rates in selected industrial countries
UK
Annual growth rate ()
61
Growth rates in selected industrial countries
UK
Annual growth rate ()
62
Growth rates in selected industrial countries
UK
France
Annual growth rate ()
63
Growth rates in selected industrial countries
UK
France
Annual growth rate ()
64
Growth rates in selected industrial countries
Germany
UK
France
Annual growth rate ()
65
Growth rates in selected industrial countries
Germany
UK
France
Annual growth rate ()
66
Growth rates in selected industrial countries
Germany
UK
France
USA
Annual growth rate ()
67
Growth rates in selected industrial countries
Germany
UK
France
USA
Annual growth rate ()
68
Growth rates in selected industrial countries
Germany
UK
Japan
France
USA
Annual growth rate ()
69
Growth rates in selected industrial countries
Germany
UK
Japan
France
USA
Annual growth rate ()
70
Growth and the Business Cycle

• Causes of potential growth
• increases in the quantity of factors
• capital
• labour
• land and raw materials
• the problem of diminishing returns
• increases in factor productivity
• Policies to achieve growth
• demand-side and supply-side policies
• market-orientated and interventionist policies

71
Unemployment

• The meaning of 'unemployment'
• The costs of unemployment
• Official measures of unemployment
• claimant unemployment
• do claimant statistics give a true picture of
  unemployment?
• standardised unemployment (ILO / OECD)

72
Unemployment rates in selected industrial
countries
UK
73
Unemployment rates in selected industrial
countries
UK
74
Unemployment rates in selected industrial
countries
UK
France
75
Unemployment rates in selected industrial
countries
UK
France
76
Unemployment rates in selected industrial
countries
Germany
UK
France
77
Unemployment rates in selected industrial
countries
Germany
UK
France
78
Unemployment rates in selected industrial
countries
Germany
UK
France
USA
79
Unemployment rates in selected industrial
countries
Germany
UK
France
USA
80
Unemployment rates in selected industrial
countries
Germany
Japan
UK
France
USA
81
Unemployment rates in selected industrial
countries
Germany
Japan
UK
France
USA
82
Unemployment rates in selected industrial
countries
Germany
Japan
UK
OECD
France
USA
83
Unemployment rates in selected industrial
countries
Germany
Japan
UK
OECD
France
USA
84
Standardised unemployment rates in different
sectors of the labour market (2002)
85
Standardised unemployment rates in different
sectors of the labour market (2002)
86
Standardised unemployment rates in different
sectors of the labour market (2002)
87
Standardised unemployment rates in different
sectors of the labour market (2002)
88
Unemployment

• Unemployment and the labour market
• the aggregate demand and supply of labour
• equilibrium in the model

89
Disequilibrium unemployment
ASL
Average (real) wage rate
We
ADL
O
No. of workers
90
Unemployment

• Unemployment and the labour market
• the aggregate demand and supply of labour
• equilibrium in the model
• disequilibrium unemployment

91
Disequilibrium unemployment
ASL
Average (real) wage rate
W2
We
ADL
O
No. of workers
92
Unemployment

• Unemployment and the labour market
• the aggregate demand and supply of labour
• equilibrium in the model
• disequilibrium unemployment
• equilibrium unemployment

93
Equilibrium unemployment
ASL
Average (real) wage rate
e
We
ADL
O
Qe
No. of workers
94
Equilibrium unemployment
ASL
N
Average (real) wage rate
e
We
ADL
O
Qe
No. of workers
95
Equilibrium and disequilibrium unemployment
ASL
Average (real) wage rate
e
We
ADL
O
Qe
No. of workers
96
Equilibrium and disequilibrium unemployment
ASL
Average (real) wage rate
b
a
W2
e
We
ADL
O
No. of workers
97
Equilibrium and disequilibrium unemployment
ASL
N
Disequilibrium unemployment
Average (real) wage rate
b
a
c
W2
e
We
ADL
O
No. of workers
98
Unemployment

• Disequilibrium unemployment
• real-wage (classical) unemployment
• demand-deficient (cyclical) unemployment
• unemployment arising from a growth in the labour
  supply

99
Unemployment

• Equilibrium unemployment
• frictional (search) unemployment
• structural unemployment
• changing pattern of demand
• technological unemployment
• regional unemployment
• seasonal unemployment

100
Aggregate Demand and Supply

• The aggregate demand curve

101
Aggregate demand and aggregate supply
Price level
O
National output
102
Aggregate Demand and Supply

• The aggregate demand curve
• Why aggregate demand curves slope downwards

103
Aggregate Demand and Supply

• The aggregate demand curve
• Why aggregate demand curves slope downwards
• import effect

104
Aggregate demand and aggregate supply
Price level
O
National output
105
Aggregate Demand and Supply

• The aggregate demand curve
• Why aggregate demand curves slope downwards
• import effect
• interest-rate effect

106
Aggregate demand and aggregate supply
Price level
O
National output
107
Aggregate Demand and Supply

• The aggregate demand curve
• Why aggregate demand curves slope downwards
• import effect
• interest-rate effect
• savings effect

108
Aggregate demand and aggregate supply
Price level
O
National output
109
Aggregate Demand and Supply

• The aggregate demand curve
• Why aggregate demand curves slope downwards
• import effect
• interest-rate effect
• savings effect
• The aggregate supply curve

110
Aggregate demand and aggregate supply
Price level
O
National output
111
Aggregate Demand and Supply

• The aggregate demand curve
• Why aggregate demand curves slope downwards
• import effect
• interest-rate effect
• savings effect
• The aggregate supply curve
• Why aggregate supply curves generally slope
  upwards

112
Aggregate demand and aggregate supply
Price level
O
National output
113
Aggregate Demand and Supply

• The aggregate demand curve
• Why aggregate demand curves slope downwards
• import effect
• interest-rate effect
• savings effect
• The aggregate supply curve
• Why aggregate supply curves generally slope
  upwards
• Equilibrium

114
Aggregate demand and aggregate supply
AS
Price level
Pe
AD
O
National output
115
Aggregate demand and aggregate supply
AS
Price level
Pe
P2
AD
O
National output
116
Aggregate Demand and Supply

• The aggregate demand curve
• Why aggregate demand curves slope downwards
• import effect
• interest-rate effect
• savings effect
• The aggregate supply curve
• Why AS curves generally slope upwards
• Equilibrium
• Effect of a shift in the AD curve

117
Inflation

• Defining inflation
• The costs of inflation
• redistribution
• uncertainty
• balance of payments
• resources used to cope with inflation
• Experience of inflation since 1965

118
Inflation rates in selected industrial countries
UK
119
Inflation rates in selected industrial countries
UK
120
Inflation rates in selected industrial countries
UK
EU 15
121
Inflation rates in selected industrial countries
UK
EU 15
122
Inflation rates in selected industrial countries
USA
UK
EU 15
123
Inflation rates in selected industrial countries
USA
UK
EU 15
124
Inflation rates in selected industrial countries
USA
UK
EU 15
Japan
125
Inflation rates in selected industrial countries
USA
UK
EU 15
Japan
126
Inflation rates in selected industrial countries
USA
UK
OECD
EU 15
Japan
127
Inflation rates in selected industrial countries
USA
UK
OECD
EU 15
Japan
128
Inflation

• Types of inflation
• demand pull

129
Demand-pull inflation
AS
Price level
P1
AD1
O
Q1
National output
130
Demand-pull inflation
AS
Price level
P1
AD2
AD1
O
Q1
National output
131
Demand-pull inflation
AS
Price level
P2
P1
AD2
AD1
O
Q1
National output
132
Inflation

• Types of inflation
• demand pull
• cost push

133
Inflation

• Types of inflation
• demand pull
• cost push
• wage push

134
Inflation

• Types of inflation
• demand pull
• cost push
• wage push
• profit push

135
Inflation

• Types of inflation
• demand pull
• cost push
• wage push
• profit push
• import-price push

136
Cost-push inflation
AS1
Price level
P1
AD
O
Q1
National output
137
Cost-push inflation
AS2
AS1
Price level
P1
AD
O
Q1
National output
138
Cost-push inflation
AS2
AS1
Price level
P2
P1
AD
O
Q1
National output
139
Inflation

• Types of inflation
• demand pull
• cost push
• wage push
• profit push
• import-price push
• the interaction of demand-pull and cost-push
  inflation

140
The interaction of demand-pull and cost-push
inflation
AS1
Price level
P1
AD1
O
National output
141
The interaction of demand-pull and cost-push
inflation
AS2
AS1
Price level
P1
AD2
AD1
O
National output
142
The interaction of demand-pull and cost-push
inflation
AS3
AS2
AS1
Price level
P2
AD3
P1
AD2
AD1
O
National output
143
Inflation

• Types of inflation
• demand pull
• cost push
• wage push
• profit push
• import-price push
• structural (demand shift)

144
Inflation

• Types of inflation
• demand pull
• cost push
• wage push
• profit push
• import-price push
• structural (demand shift)
• expectations and inflation

145
Inflation

• Types of inflation
• demand pull
• cost push
• wage push
• profit push
• import-price push
• structural (demand shift)
• expectations and inflation
• Policies to tackle inflation

146
Inflation

• Types of inflation
• demand pull
• cost push
• wage push
• profit push
• import-price push
• structural (demand shift)
• expectations and inflation
• Policies to tackle inflation
• demand-side policies

147
Inflation

• Types of inflation
• demand pull
• cost push
• wage push
• profit push
• import-price push
• structural (demand shift)
• expectations and inflation
• Policies to tackle inflation
• demand-side policies
• supply-side policies