Macroeconomic Objectives

The major macroeconomic issues

✜ economic growth
✜ unemployment
✜ inflation
✜ balance of payments and exchange rates
✦ balance of payments deficits and surpluses
✦ exchange rate movements
 The Circular Flow of Income
■ The inner flow
 The circular flow of income

Firms

Consumption of
Factor domestically
payments 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
Consumption of expenditure (G)

Factor domestically
BANKS, etc GOV. ABROAD
payments produced goods
and services (Cd)
Import
Net expenditure (M)
Net taxes (T)
saving (S)

WITHDRAWALS
 The Circular Flow of Income

■ The relationship between injections and

withdrawals
planned injections may not equal planned
withdrawals

■ Equilibrium in the circular flow

■ The circular flow and the four
macroeconomic objectives
 The circular flow of income

INJECTIONS

Export
expenditure (X)
Investment (I)
Government
Consumption of expenditure (G)

Factor domestically
BANKS, etc GOV. ABROAD
payments produced goods
and services (Cd)
Import
Net expenditure (M)
Net taxes (T)
saving (S)

WITHDRAWALS
 Measuring national income
■ GDP: the measure of national income
■ Methods of measuring GDP
✜ the product approach
✜ the income approach
✜ the expenditure approach
The circular flow of national income and expenditure
The circular flow of national income and expenditure
(1) Production

(2) Incomes (3) Expenditure

 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 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
 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
 Growth and the Business Cycle
■ Growth in actual and potential growth
■ Economic growth and the business cycle
✜ fluctuations in actual growth
 The business cycle

Potential output
National output

Actual
output

O
Time
 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
 The business cycle

Potential output
National output

3
4
2 Actual
3
output
4
2 1

O
Time
 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
 The business cycle

Potential output

Trend
National output

output

Actual
output

O
Time
 Growth and the Business Cycle
■ Growth in actual and potential growth
■ Economic growth and the business cycle
 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
 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
 Growth rates in selected industrial countries
10
9 UK Germany
Japan
8 France USA
Annual growth rate (%)

7
6
5
4
3
2
1
0
-1
-2
-3
1970 1975 1980 1985 1990 1995 2000
 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 policies
 Aggregate Demand and Supply
■ The aggregate demand curve
Price level Aggregate demand and aggregate supply

AD

National output
 Aggregate Demand and Supply

■ The aggregate demand curve

✜ Why aggregate demand curves slope
downwards
 Aggregate Demand and Supply

■ The aggregate demand curve

✜ Why aggregate demand curves slope
downwards
✦ import effect
Price level Aggregate demand and aggregate supply

AD

National output
 Aggregate Demand and Supply

■ The aggregate demand curve

✜ Why aggregate demand curves slope
downwards
✦ import effect
✦ interest-rate effect
Price level Aggregate demand and aggregate supply

AD

National output
 Aggregate Demand and Supply

■ The aggregate demand curve

✜ Why aggregate demand curves slope
downwards
✦ import effect
✦ interest-rate effect
✦ savings effect
Price level Aggregate demand and aggregate supply

AD

National output
 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

 Aggregate demand and aggregate supply

AS
Price level

AD

National output
 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
 Aggregate demand and aggregate supply

AS
Price level

AD

National output
 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
 Aggregate demand and aggregate supply

AS
Price level

Pe

AD

National output
 Aggregate demand and aggregate supply

AS
Price level

Pe
b a
P2

AD

National output
 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