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Chapter 19 Introduction to macroeconomics

Chapter 19 Introduction to macroeconomics. David Begg, Stanley Fischer and Rudiger Dornbusch, Economics , 9th Edition, McGraw-Hill, 2008 PowerPoint presentation by Alex Tackie and Damian Ward. Macroeconomics is. the study of the economy as a whole it deals with broad aggregates

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Chapter 19 Introduction to macroeconomics

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  1. 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

  2. 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.

  3. 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

  4. 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

  5. Inflation in Turkey2003-2011 Source: TEPAV

  6. Inflation in UK, USA and Germany 1960 - 2008

  7. Unemployment in Turkey1988-2011

  8. Unemploymentin UK, USA and Germany

  9. Economic Growth in Turkey

  10. Economic Growth in the World

  11. The Sectoral Division of GDP in Turkey

  12. Economic growthin UK, USA and Germany

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

  14. 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

  15. The Circular-Flow Diagram • Markets for Goods and Services • Firms sell • Households buy • Markets for Factors of Production • Households sell • Firms buy

  16. The Circular-Flow Diagram • Factors of Production • Inputs used to produce goods and services • Land, labor, and capital

  17. The circular flow of income, expenditure and output I C + I C S Households Firms Y

  18. Hosehold Firms Circular Flow Diagram Consumption (C) = 5000 Savings (S) = 2000 Investment (I) = 2000 Goods and Servies Factors of Production Factoral Income (Y) = 7000

  19. Closed Economy without GovernmentY=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).

  20. 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.

  21. 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.

  22. 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.

  23. 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

  24. Government in the circular flow I C + I + G C + I + G - Te C S G Te Households Government Firms B - Td Y + B - Td Y

  25. 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.

  26. 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

  27. 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

  28. 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

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