Chapter 20 Introduction to macroeconomics and national income accounting David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith Macroeconomics is s the study of the economy as a whole s it deals with broad aggregates s but uses the same style of thinking about economic issues as in microeconomics 20.2 Some key issues in macroeconomics s Inflation – s Unemployment – s the rate of change of the general price level 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 s it is closely related to the economy's total output 20.3 More key issues in macroeconomics s Economic growth – s 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 20.4 Inflation in the UK, 1950-99 30 25 % p.a 20 15 10 Source: Economic Trends Annual Supplement, Labour Market Trends 20.5 Inflation in selected European countries Germany France Belgium EU Finland UK Spain Italy Portugal Greece % change 1998 compared with 1997 20.6 Inflation in UK, USA and Germany % p.a 16 14 12 10 1960-73 1973-81 UK USA 1981-90 1990-98 Germany 20.7 Unemployment in the UK, 1950-99 14 12 % p.a 10 Source: Economic Trends Annual Supplement, Labour Market Trends 20.8 Unemployment in selected European countries Germany France Belgium EU Finland UK Spain Italy Portugal Greece 10 15 20 % unemployment (ILO measure) 1998 20.9 Unemployment in UK, USA and Germany 10 % p.a 1960-73 1973-81 UK USA 1981-90 1990-98 Germany 20.10 Economic growth in UK, USA and Germany % p.a 1960-73 1973-81 UK USA 1981-90 1990-98 Germany 20.11 The circular flow of income, expenditure and output I C S C+I Households Firms Y 20.12 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 20.13 Adding the foreign sector s To incorporate the foreign sector into the circular flow s we must recognize that residents of a country will buy imports from abroad s and that domestic firms will sell (export) goods and services abroad 20.14 GDP and GNP s Gross domestic product (GDP) – measures the output produced by factors of production located in the domestic economy s Gross national product (GNP) s measures the total income earned by domestic citizens GNP = GDP + net income from abroad – 20.15 Three measures of national output s Expenditure – – s Income – – s the sum of expenditures in the economy Y=C+I+G+X-Z the sum of incomes paid for factor services wages, profits, etc Output – the sum of output (value added) produced in the economy 20.16 National income accounting: a summary NYA GNP (and GNI) at market prices G I X-Z C NYA Deprec'n Indirect taxes GDP NNP at market at basic National prices prices income Profits, rents Selfemployment Wages and salaries 20.17 What GNP does and does not measure s 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 20.18 ... the overall performance of the economy 20. 4 Inflation in the UK, 1950-99 30 25 % p.a 20 15 10 Source: Economic Trends Annual Supplement, Labour Market Trends 20. 5 Inflation in selected European... Labour Market Trends 20. 8 Unemployment in selected European countries Germany France Belgium EU Finland UK Spain Italy Portugal Greece 10 15 20 % unemployment (ILO measure) 1998 20. 9 Unemployment... Germany 20. 10 Economic growth in UK, USA and Germany % p.a 1960-73 1973-81 UK USA 1981-90 1990-98 Germany 20. 11 The circular flow of income, expenditure and output I C S C+I Households Firms Y 20. 12