©The McGraw-Hill Companies, 2008

Chapter 19Introduction to macroeconomics

David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 9th Edition, McGraw-Hill, 2008

PowerPoint presentation by Alex Tackie and Damian Ward

©The McGraw-Hill Companies, 2008

Macroeconomics is ...

• the study of the economy as a whole• it deals with broad aggregates• but uses the same style of thinking

about economic issues as in microeconomics.

©The McGraw-Hill Companies, 2008

Some key issues in macroeconomics

• Inflation– the rate of change of the general price level

• Unemployment– 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• it is closely related to the economy's total output

©The McGraw-Hill Companies, 2008

More key issues in macroeconomics

• Economic growth– 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

©The McGraw-Hill Companies, 2008

Inflation in Turkey2003-2011

5Source: TEPAV

©The McGraw-Hill Companies, 2008

Inflation in UK, USA and Germany 1960 - 2008

0

2

4

6

8

10

12

14

16

Annual %

1960-73 1973-81 1981-90 1990-01 2001-08

UK

USA

Germany

©The McGraw-Hill Companies, 2008

Unemployment in Turkey1988-2011

7

©The McGraw-Hill Companies, 2008

Unemploymentin UK, USA and Germany

0

2

4

6

8

10

% p

.a.

1960-73 1973-81 1981-90 1990-01 2001-08

UK USA Germany

©The McGraw-Hill Companies, 2008

Economic Growth in Turkey

©The McGraw-Hill Companies, 200810

Economic Growth in the World

©The McGraw-Hill Companies, 2008

The Sectoral Division of GDP in Turkey

©The McGraw-Hill Companies, 2008

Economic growthin UK, USA and Germany

0

1

2

3

4

5

% p

.a.

1960-73 1973-81 1981-90 1990-01 2001-08

UK USA Germany

©The McGraw-Hill Companies, 2008

Circular Flow Diagram

• Circular Flow Diagram shows how the resources and products flow between households, firms and the government.

©The McGraw-Hill Companies, 2008

The Circular-Flow Diagram

• Firms– Produce and sell goods and services– Hire and use factors of production

• Households– Buy and consume goods and services– Own and sell factors of production

©The McGraw-Hill Companies, 2008

The Circular-Flow Diagram

• Markets for Goods and Services– Firms sell– Households buy

• Markets for Factors of Production– Households sell– Firms buy

©The McGraw-Hill Companies, 2008

The Circular-Flow Diagram

• Factors of Production– Inputs used to produce goods and

services– Land, labor, and capital

©The McGraw-Hill Companies, 2008

The circular flow of income, expenditure and output

Y

Households Firms

C + I

I

CS

©The McGraw-Hill Companies, 2008

Circular Flow Diagram

18

Hosehold Firms

Factoral Income (Y)= 7000

Factors of Production

Savings (S)= 2000

Consumption (C)= 5000

Goods and ServiesInvestment (I)

= 2000

©The McGraw-Hill Companies, 2008

Closed Economy without Government

Y=C+I• Households earn 7000 because they own factors of

production • They spend 5000 and save 2000• So,

– Y= C+S• The savings are used for investment• So,

– S = I is the case. – Y = C+ I– In other words, the output (Y) can be used for consumtion

(C) and investment (I).

19

©The McGraw-Hill Companies, 2008

Investment and Savings

• Investment (I), is the spending for acquiring newly produced physical capital. – Buying an old factory is not an investment for

the economy.• Savings (S), household income minus the

consumption• If the savings are not under the pillow

then, S = I is always the case.

20

©The McGraw-Hill Companies, 2008

Gross Domestic Product• The market value of final goods and services that

are produced in a country within a specified time by the residents of a country.

• Final goods and services: We have to exclude the intermediate products in order not to have double counting problem.

• Value added: The increase in value at the end of the production process.

21

©The McGraw-Hill Companies, 2008

Examples• Ice-cream is a final good if it is consumed by the

households.

• Steel is an intermediate good because it will be used for industries such as auto sector in the later stages.

• The stocks are counted as final good.

• Machinary is a final good because the firms are the final users for these products.

22

©The McGraw-Hill Companies, 2008

Adding Goverment into the Circular Flow Diagram

• What happens if we add government to the circular flow diagram– The government collects indirect taxes from

consumption and direct taxes from income and uses for government purchases and transfer payments.

• Indirect taxes: Te

• Direct taxes: Td

• Government expenditure: G• Transfers: B

23

©The McGraw-Hill Companies, 2008

Government in the circular flow

Y

C + I + G

I

CS

Households FirmsGovernment

C + I + G - Te

Te

G

B - Td

Y + B - Td

©The McGraw-Hill Companies, 2008

Adding the foreign sector

• To incorporate the foreign sector into the circular flow

• we must recognise that residents of a country will buy imports from abroad

• and that domestic firms will sell (export) goods and services abroad.

©The McGraw-Hill Companies, 2008

GDP and GNP

• Gross domestic product (GDP)– measures the output produced by

factors of production located in the domestic economy

• Gross national product (GNP)– measures the total income earned by

domestic citizens• GNP = GDP + net income from abroad

©The McGraw-Hill Companies, 2008

Three measures of national output

• Expenditure– the sum of expenditures in the economy– Y = C + I + G + X - Z

• Income– the sum of incomes paid for factor services– wages, profits, etc.

• Output– the sum of output (value added) produced

in the economy

©The McGraw-Hill Companies, 2008

What GNP does and does not measure

• 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