Introduction to Macroeconomics

Business Economics U52004

Objectives
1.1 Be aware of the role of business enterprise within the economy 1.2 Apply basic economic principles to the analysis of decision- making within the firm 1.3 Identify and explain the impact of key government policies on business performance

Objectives
2.1 Identify and select relevant economic data for analysing particular business problems 2.2 Recognise and interpret relationships between economic variables 2.3 Use demand and supply analysis to explain and understand business decision making

Objectives
Transferable skills (Taught (T), Practiced (P), Assessed (A)) Self-management: P Learning skills: PTA Communication: PTA Teamwork: P Problem solving: PTA

Snapshot

Macroeconomic Objectives Key Macroeconomic Terms Macro variables: Data The Circular Flow of Income Total Demand Inflation Total Supply Macroeconomic Equilibrium The Business Cycle

Macroeconomic Objectives

Distinction between microeconomics and macroeconomics Key macroeconomic Terms

GDP, Gross Domestic Product, is a measure of the total output produced by an economy in a given year. Inflation is the rate of change in the average price level. Inflation of 2% indicates that prices have risen by 2% during the previous month.

Key Macroeconomic Terms

Unemployment is the number of individuals seeking work but do not currently have a job. The current account of the balance of payments is the difference between exported and imported goods and services. Interest rates are the price of money and set by a central bank. The government deficit is the difference between government spending and tax receipts.

Economic Growth, Inflation and Unemployment in India

GDP- $796.1 billion (2006 est.) GDP - real growth rate:8.5% (2006 est.) Unemployment rate:7.8% (2006 est.) Population below poverty line: 25 % (2002) Household income or consumption by percentage share:lowest 10%: 3.5% highest 10%: 33.5% (1997) Inflation: Above 7%

Economic growth (average % per annum), Unemployment (average %), Inflation (average % per annum)
France Germany Italy Japan Growth 1960-9 1970-9 1980-9 1990-9 UK USA EU(15) OECD Brazil Malaysia Singapore

7.5 3.2 2.2 1.7

4.4 2.6 1.8 2.1

5.3 3.8 2.4 1.4

10.9 4.3 4.0 1.3

2.9 2.0 2.4 2.2

4.3 2.8 2.5 3.3

3.5 3.2 2.2 1.9

4.6 3.6 2.6 2.4

5.4 8.1 3.0 3.2

6.5 7.9 5.8 7.8

8.8 8.3 6.1 8.6

Unemployment 1960-9 1.5 1970-9 3.7 1980-9 9.0 1990-9 11.2 Inflation 1960-9 1970-9 1980-9 1990-9

0.9 2.3 5.9 7.5

5.1 6.4 9.5 10.6

1.3 1.7 2.5 3.0

2.2 4.5 10.0 5.8

4.1 6.1 7.2 5.8

2.5 4.0 9.3 9.9

2.5 4.3 7.3 7.2

n/a n/a n/a n/a

n/a n/a 6.2 3.9

n/a n/a 3.6 2.6

4.2 9.4 7.3 1.9

3.2 5.0 2.9 2.5

4.4 13.9 11.2 3.9

4.9 9.0 2.5 1.1

4.1 13.0 7.4 3.5

2.8 6.8 5.5 2.8

3.7 10.3 7.4 3.2

3.1 9.2 8.9 4.9

46.1 38.6 227.8 300.9

-0.3 7.3 2.2 3.8

1.1 5.9 2.5 2.0

The Circular Flow of Income

The inner flow

The circular flow of income Firms

Factor payments

Consumption of domestically produced goods and services (Cd)

Households

The Circular Flow of Income

Withdrawals
net saving net taxes import expenditure

Injections
investment
government expenditure export expenditure

The circular flow of income

INJECTIONS
Export expenditure (X) Investment (I) Government expenditure (G) BANKS, etc GOV. ABROAD

Factor payments

Consumption of domestically produced goods and services (Cd)

Net saving (S)

Import Net expenditure (M) taxes (T)

WITHDRAWALS

The Circular Flow of Income

The relationship between injections and withdrawals

the links between them

The circular flow of income

INJECTIONS
Export expenditure (X) Investment (I) Government expenditure (G) BANKS, etc GOV. ABROAD

Factor payments

Consumption of domestically produced goods and services (Cd)

Net saving (S)

Import Net expenditure (M) taxes (T)

WITHDRAWALS

The Circular Flow of Income

The relationship between injections and withdrawals

the links between them
planned injections may not equal planned withdrawals

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 of income

INJECTIONS
Export expenditure (X) Investment (I) Government expenditure (G) BANKS, etc GOV. ABROAD

Factor payments

Consumption of domestically produced goods and services (Cd)

Net saving (S)

Import Net expenditure (M) taxes (T)

WITHDRAWALS

Total Expenditure

Total expenditure is simply all separate sources of spending within the economy. It includes consumption by households, investment by firms and public spending by the government. Net exports are also included in it. If any of these increase, then total expenditure increases and the flow of goods and services should increase to match the increased demand.

Aggregate Demand

Total expenditure representing consumption, plus investment, plus government spending plus net exports is in fact aggregate demand.

Average Price Level

The average price level is the average price of goods and services in an economy. The change in the average price level is a measure of inflation. The benefit of looking at the relationship between aggregate demand and inflation is that control of inflation has become a key aspect of modern macroeconomic policy.

Aggregate Demand and Inflation

AD = C+I+G+NZ Where C = consumption, I = investment, G = government spending and NZ = net exports.

Aggregate Demand and Inflation and Interest Rates

Inflation
P P1 AD Y2 Y1

National Output

Aggregate Demand, Inflation and Increased Govt. Spending

Inflation

P1
AD2= C+I+G2+NZ AD1= C+IG1+NZ Y1 Y2 National Output

Aggregate Supply and Inflation

Difference between nominal and real values. Nominal prices and wages are not adjusted for inflation. Real prices and wages are adjusted for inflation. If I earn $100 a week and if inflation is 2%, then what is my real wage?

Aggregate Supply and Inflation

When wages adjust fully for inflation a firm is not affected. But if wages lag behind inflation then the economy would have a positive sloping supply curve for inflation.

Macroeconomic Equilibrium
Inflation AS

AD

National Output

Inflation and Deflation

Inflation is a measure of how fast prices are rising. So, an increase in the price level is inflation and a decrease in the price level is deflation.

The business cycle

Potential output

National output

3 3 4 2 1 1 2 4 Actual output

Time

Recap

Macroeconomic Objectives Key Macroeconomic Terms Macro variables: Data The Circular Flow of Income Total Demand Inflation Total Supply Macroeconomic Equilibrium The Business Cycle