1. Introduction
Modules 11 and 12

2. Module 11 – Macroeconomics Overview
This module is a first introduction to macroeconomics
Important topics are
Potential output
Production possibility curve
Actual output
Economic circulation
Demand for the output

3. WHAT DO ECONOMISTS STUDY?
Macroeconomic issues
growth
unemployment
inflation
balance of payments problems
cyclical fluctuations 3

4. Potential Output
Potential output is linked to the economy's supply side or productive capacity
What can be produced, given the limited supply of the factors of production and the technological state of the economy
Potential output will grow over time because the supply of factors of production increase and above all due to technological growth

5. Potential and Actual Output in Norway

6. Actual output
Actual output is known as Gross National Product (GNP), and there are several ways to measuring the overall level of economic activity
The production approach (GNP)
The spending (expenditure) approach (GNE)
The income approach (GNI)

7. The circular flow of goods and incomes

8. The circular flow of goods and incomes
Goods and services

9. The circular flow of goods and incomes
Goods and services
Consumer
expenditure

10. The circular flow of goods and incomes £
Goods and services
Consumer
expenditure
Services of factors of production (labour, etc)

11. The circular flow of goods and incomes £ £
Goods and services
Consumer
expenditure
Wages, rent
dividends, etc.
Services of factors of production (labour, etc)

12. The circular flow of goods and incomes £ £
Goods and services
Consumer
expenditure
GOODS MARKETS
FACTOR MARKETS
Wages, rent
dividends, etc.
Services of factors of production (labour, etc)

13. Measuring the activity
GNP (or more correctly GDP) as a production approach is the value of all final goods produced in the economy
Demand for what is produced can conveniently be divided into various groups
Private consumption (C)
Private investment (I)
Government (G)
The foreign sector (X – Z)
The factors of production receive income for their efforts
GNP = GNE = GNI = Y
Y = C + I + G + X – Z

14. Module 12 – Potential Output
We have already established that potential output is closely related to the productive capacity of the economy
In macroeconomics, it is frequently expressed by the production possibilitu curve (PPC)
PPC shows what can be produced using all available resources as efficiently as possible

15. A production possibility curve
Units of food Units of clothing
(millions) (millions) 8m
7m m
6m m
5m m
4m m
3m m
2m m
1m m m
Units of food (millions)
Units of clothing (millions)

16. A production possibility curve
Units of food Units of clothing
(millions) (millions)
a m
7m m
6m m
5m m
4m m
3m m
2m m
1m m m
Units of food (millions)
Units of clothing (millions)

17. A production possibility curve
Units of food Units of clothing
(millions) (millions) 8m
b m m
6m m
5m m
4m m
3m m
2m m
1m m m
Units of food (millions)
Units of clothing (millions)

18. A production possibility curve
Units of food Units of clothing
(millions) (millions) 8m
7m m
c m m
5m m
4m m
3m m
2m m
1m m m
Units of food (millions)
Units of clothing (millions)

19. A production possibility curve
Units of food Units of clothing
(millions) (millions) 8m
7m m
6m m
5m m
4m m
3m m
2m m
1m m m
Units of food (millions)
Units of clothing (millions)

20. Increasing opportunity costsx 1 y 1
Units of food (millions)
Units of clothing (millions)

21. Increasing opportunity costsx 1 y 1 2
Units of food (millions) z 1
Units of clothing (millions)

22. Making a fuller use of resourcesx
Production inside
the production
possibility curve y
Food v O
Clothing

23. Growth in potential output
Food
Now O
Clothing

24. Growth in potential output
5 years’ time
Food
Now O
Clothing

25. The textbook does not give any thorough discussion on unemployment
It is sometimes helpful to separate unemployment into two parts
Equilibrium (natural) unemployment
Disequilibrium (involuntary) unemployment
The labour market is (almost) like any other market – supply and demand

26. CAUSES OF UNEMPLOYMENT
Disequilibrium unemployment
real-wage (classical) unemployment
demand-deficient (cyclical) unemployment
unemployment arising from a growth in the labour supply 10

27. CAUSES OF UNEMPLOYMENT
Equilibrium unemployment
frictional (search) unemployment
structural unemployment
changing pattern of demand
regional unemployment
technological unemployment
seasonal unemployment 12

28. Unemployment rates in selected industrial countriesUK

29. Unemployment rates in selected industrial countriesUK

30. Unemployment rates in selected industrial countriesUK
France

31. Unemployment rates in selected industrial countriesUK
France

32. Unemployment rates in selected industrial countriesUK
Germany
France

33. Unemployment rates in selected industrial countriesUK
Germany
France

34. Unemployment rates in selected industrial countriesUK
Germany
France
USA

35. Unemployment rates in selected industrial countriesUK
Germany
France
USA

36. Unemployment rates in selected industrial countriesUK
Germany
Japan
France
USA

37. Unemployment rates in selected industrial countriesUK
Germany
Japan
France
USA

38. Unemployment rates in selected industrial countriesUK
Germany
Japan
France
USA
OECD

39. Unemployment rates in selected industrial countriesUK
Germany
Japan
France
USA
OECD

40. Disequilibrium unemployment
ASL
Average (real) wage rate We Qe
ADL O
No. of workers

41. Disequilibrium unemployment
ASL
Average (real) wage rate B A W2 Q2 Q1 We
ADL O
No. of workers

42. Equilibrium and disequilibrium unemployment
ASL
Average (real) wage rate e We
ADL O Qe
No. of workers

43. Equilibrium unemployment
ASL N
Average (real) wage rate e d We Q2
ADL O Qe
No. of workers

44. Equilibrium and disequilibrium unemployment
ASL
Disequilibrium
unemployment
Average (real) wage rate b a W2 e We
ADL O
No. of workers

45. Equilibrium and disequilibrium unemployment
ASL N
Disequilibrium
unemployment
Average (real) wage rate b a c W2
Equilibrium
unemployment e We
ADL O
No. of workers

46. Real-wage unemployment
ASL
Average (real) wage rate b b’ a W1 Q2 Q1 We
ADL 2
ADL O Qe
No. of workers

47. Demand-deficient unemployment
ASL
Average (real) wage rate W1 Q2 W2
ADL 1
ADL 2 O Q1
No. of workers

48. Arthur Okun
The connection between unemployment and GDP growth is often formally summarised by the statistical relationship known as "Oakum's law" as developed by the late economist Arthur Oakum in 1962, the "law" related decreases in the unemployment rate to increases in output growth.
In his original research, Oakum found that a 1-percentage-point decline in the unemployment rate was, on average, associated with additional output growth of about 3 percentage points
Oakum's law is now widely accepted as stating that a 1-percentage-point decrease in the unemployment rate is associated with additional output growth of about 2 percent
The negative correlation between changes in the unemployment rate and changes in GDP growth is viewed as one of the most consistent relationships in macroeconomics.

49. RELATIONSHIP BETWEEN INFLATION AND UNEMPLOYMENT
Aggregate demand and inflation and unemployment
effects of increases in aggregate demand (relative to potential output)
how the objectives vary with the course of the business cycle
The Phillips curve
the original curve
the apparent policy implications 6

50. The original Phillips curve
Wage inflation (%)
Unemployment (%)

51. The breakdown of the Phillips curve?
Inflation (%)
The breakdown of the Phillips curve? 65 62 66 61 64 67 63 60
Unemployment (%)

52. Original Phillips curve
Inflation (%)
The breakdown of the Phillips curve?
Original Phillips curve 65 62 66 61 64 67 63 60
Unemployment (%)

53. The breakdown of the Phillips curve?
Inflation (%)
The breakdown of the Phillips curve? 74 71 73 72 70 69 65 62 68 66 61 64 67 63 60
Unemployment (%)

54. The breakdown of the Phillips curve?
Inflation (%)
The breakdown of the Phillips curve? 75 76 74 77 79 71 73 78 72 70 69 65 62 68 66 61 64 67 63 60
Unemployment (%)

55. The breakdown of the Phillips curve?
Inflation (%)
The breakdown of the Phillips curve? 75 80 76 74 77 79 81 71 73 82 78 72 70 85 69 84 65 62 68 83 66 61 64 67 63 60
Unemployment (%)

56. The breakdown of the Phillips curve?
Inflation (%)
The breakdown of the Phillips curve? 75 80 76 74 77 79 81 90 71 73 82 78 89 72 70 91 85 69 84 65 88 62 68 83 87 66 95 92 86 61 64 67 94 63 93 60
Unemployment (%)

57. The breakdown of the Phillips curve?
Inflation (%)
The breakdown of the Phillips curve? 75 80 76 74 77 79 81 90 71 73 82 78 89 72 70 91 85 69 84 65 88 68 83 62 98 87 66 00 97 95 92 86 61 64 67 94 01 96 63 99 93 02 60
Unemployment (%)