0. Macroeconomics The Income and Output of Nations

1. ECONOMIC AGENTS
Households
FIRMS
Government

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

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

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

5. 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

6. 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

7. 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.

8. 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

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

10. 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

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

12. 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.

13. 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)

14. 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

15. 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

16. 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

17. Or we can look at it another way

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

19. = 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

20. 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.

21. 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.

22. 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

23. 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

24. 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$

25. GDP/capita in different countries

26. GDP compared

27. What’s wrong with this chart?

28. GDP Composition

29. GDP per capita
Who’s the richest?

30. GDP AND GDP/Capita WORLD

31. Income per capita

32. GNP per capita growth rates

33. REAL GDP PER CAPITA

34. National Income and Firm Sales

35. 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)

36. Unequal distribution of Income

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

38. Growth and Development
Millennium Development Goals

39. Growth and Development

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

41. Technology and Mg productivity of labour

42. 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.

43. 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

44. DEVELOPMENT

45. 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

46. 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.

47. World: GNP per capita Countries Classifications

48. U.N. HDI Classification