Macroeconomics The Income and Output of Nations

ECONOMIC AGENTS Households FIRMS Government

Circular Flow Between Firms and Households (real resources) Goods and services Households Firms FOP Input: Household includes workers, managers, entrepreneurs etc. i.e. people

Circular Flow Between Firms and Households (corresponding flow of payments) Spending on goods and services Households Firms FOP incomes

Circular Flow Between Firms and Households Spending on goods and services Goods and services Households Firms Services of productive factors Factor incomes

Three measures of national output Expenditure the sum of expenditures in the economy Income the sum of incomes all factor incomes Output the sum of output (value added) produced in the economy All three approaches are should give you the same final figure for national output

Circular Flow Between Firms and Households Spending on goods and services Expenditure Goods and services Output 3 different way of measuring the economic activity in the economy Households Firms Services of productive factors Income Factor incomes

Measuring Output Total value added Gross domestic product (GDP) is the economy’s net output after deducting goods used during production to avoid double counting E.g. egg, milk, flour used for making muffins. MUFFINS. Final Good. Gross domestic product (GDP) measures the output produced by factors of production located in the domestic economy over a period of time, usually a year.

Leakages from the Circular Flow Leakages (in terms of flow of payment) money paid to the households but not returned to firm Or flow of payments that started from firms but did not return back to firms e.g. household savings, net taxes and imports

Circular Flow Between Firms and Households (corresponding flow of payments) Spending on goods and services Leakages Households Firms Factor incomes

Injections into the Circular Flow Injections (in terms of flow of payment) are revenue for firms not from sales to household e.g. investment by firms, government purchases and exports

Circular Flow Between Firms and Households (corresponding flow of payments) Spending on goods and services Injections Households Firms Factor incomes

The Circular Flow of Income with Government and Foreign Trade spends money on goods & services (G) finances welfare payments, i.e. transfer payments (B) this spending is financed by taxes (T) Foreign Sector: Export (X) made at local economy but sold abroad Import (M) made abroad and bought at local economy.

The Circular Flow of Income in Symbols Domestic Output (GDP) is either Consumed (C) Invested (I) (INCREASE IN STOCK OF CAPITAL) Bought by the Government (G) Bought by the foreigners, net exports (X-M) Factor Incomes are spent on Consumption (C) Saving (S) Paying taxes net of benefits (T-B)

The Circular Flow of Income in Symbols GDP = C + I + G + (X – M) Factor Income = C + S + (T – B) Since every things produced in the economy generates equivalent factor income Domestic Output (GDP) = Factor Incomes

The Circular Flow of Income in Symbols Domestic Output Factor Incomes C + I + G + (X – M) = C + S + (T – B) C: Consumption I: Investment G: Government Expenditure X-M: Net exports C: Consumed S: Savings T-B: Taxes Net of Benefits

The Circular Flow of Income in Symbols Domestic Output Factor Incomes C + I + G + (X – M) = C + S + (T – B) rearrange I + G + X S + (T – B) + M = Total Injections Total Leakages

Or we can look at it another way

NATIONAL INCOME (GDP) Y= National Income C = Consumption I = Investment G = Government Expenditure (X-M) =Net Exports GDP = C + I + G + (X – M)

= I + G + X S + (T – B) + M Total Injections Total Leakages IF ALL THAT IS PRODUCED, IS CONSUMED, THEN Y = C. However all the revenue coming from national production is not used for consumption: © T S M Also the national production is not consumed by national local households. © Part of it goes to: Foreign countries, Government buys part of it and Some of the production is used for producing other goods: Investment. X G I Therefore… I + G + X S + (T – B) + M = Total Injections Total Leakages

GDP, GNP, Gross domestic product (GDP) measures the output produced by factors of production located in the domestic economy over a period of time, usually a year.

GNP Gross National Product (GNP) total income of citizens wherever it is earned = GDP + Net Property Income (NPI) IF GDP > GNP the citizens of the local economy are producing less than the citizens from abroad. It means that citizens from abroad in the local economy plus loclas make the local economy GDP bigger than its Citizens abroad and in the local economy together.

NNP Net National Income = GNP – Depreciation Depreciation: wear and tear of capital stock Gross: DOES NOT TAKE IN ACCOUNT DEPRECIATION. Only the increase in K stock. Net National Income = GNP – Depreciation

GDP, GNP, Depreciation Nominal Gross National Product Measures national output at current prices = value of all goods at current prices Real Gross National Product Measures output at base year prices e.g. value of today's national output at 1995 prices Allows us eliminate the effect of price changes and see how real output evolves over time

TOTAL GDP enough? GDP 1: 10,000,000$ Population 1: 5, millions Gdp / capita: 2$ GDP 2: 10,000,000$ Pop 2: 700,000 Gdp/capita: 14.2$ GDP 3: 50,000,000 Pop 3: 28 millions Gdp/capita: 1.78$

GDP/capita in different countries

GDP compared

What’s wrong with this chart?

GDP Composition

GDP per capita Who’s the richest?

GDP AND GDP/Capita WORLD

Income per capita

GNP per capita growth rates

REAL GDP PER CAPITA

National Income and Firm Sales

TOTAL GDP is ok, but not enough… GDP measures production in an economy…HOWEVER: Does NOT take in account other variables like: Does not separate K or C goods. Underground economy is not taken in account Externalities are not taken in account. Self consumption activities or household activities are not taken in account. Other issues which reflect standard of living. Education, Health, environment, security, freedom, discrimination, etc… Income distribution (inequality)

Unequal distribution of Income

THEREFORE: DEVELOPMENT INDEXES ARE NEEDED TO EXPLAIN WELL BEING IN AN ECONOMY. World dev

Growth and Development Millennium Development Goals

Growth and Development

WHY COUNTRIES GROW? Technology= increase in productivity of other factors.

Technology and Mg productivity of labour

Economic Growth Growth: An increase in an economy's ability to produce goods and services which brings about a rise in standards of living. The increase over time in the capacity of an economy to produce goods and services and (ideally) to improve the well-being of its citizens.

Development Economic Development: The process of improving the quality of human life through increasing per capita income, reducing poverty, and enhancing individual economic opportunities. Economic Development: is typically measured in terms of jobs and income, but it also includes improvements in human development, education, health, choice, and environmental sustainability The power of one: hyperlink

DEVELOPMENT

HOWEVER: Difficulties to measure development Subjective Variables (culture and religion?) Difficult to measure Not available statistics Different indicators to compare development between countries and Institutions. (U.N., WB, WTO, IMF, etc) LDC, MDC, etc… Read pp 30, 31, 32 green book

World Bank Income Classification: Income group: Economies are divided according to 2006 GNI per capita. The groups are:  low income: $905 or less; lower middle income: $906 - $3,595;  upper middle income: $3,596 - $11,115; and  high income: $11,116 or more.

World: GNP per capita Countries Classifications

U.N. HDI Classification