Aggregate Demand and Supply and Macroeconomic Problems

Aggregate Demand and Supply and Macroeconomic Problems

Macroeconomic Objectives
Distinction between microeconomics and macroeconomics The major macroeconomic issues economic growth unemployment inflation balance of payments and exchange rates balance of payments deficits and surpluses exchange rate movements

Economic growth (average % per annum), Unemployment (average %), Inflation (average % per annum)

The Circular Flow of Income
The inner flow

The circular flow of income
Firms Factor payments Consumption of domestically produced goods and services (Cd) Households

Withdrawals net saving net taxes import expenditure Injections investment government expenditure export expenditure

Export expenditure (X) INJECTIONS Government expenditure (G) Investment (I) Consumption of domestically produced goods and services (Cd) BANKS, etc Net saving (S) ABROAD Import expenditure (M) Factor payments GOV. Net taxes (T) WITHDRAWALS

The relationship between injections and withdrawals the links between them

The relationship between injections and withdrawals the links between them planned injections may not equal planned withdrawals

The relationship between injections and withdrawals the links between them planned injections may not equal planned withdrawals Equilibrium in the circular flow

The relationship between injections and withdrawals the links between them planned injections may not equal planned withdrawals Equilibrium in the circular flow The circular flow and the four macroeconomic objectives

Measuring national income
GDP: the measure of national income Methods of measuring GDP the product approach the income approach the expenditure approach

The circular flow of national income and expenditure

The circular flow of national income and expenditure
(1) Production (2) Incomes (3) Expenditure

GDP: the measure of national income Methods of measuring GDP the product approach the income approach the expenditure approach The product approach

GDP: the measure of national income Methods of measuring GDP the product approach the income approach the expenditure approach The product approach measuring GVA

UK GVA (product-based measure): 2001
Agriculture, forestry and fishing £8 241 m Mining, energy and water supply £ m Manufacturing £ m Construction £ m Wholesale and retail trade; repairs £ m Hotels and restaurants £29 359m Transport and communication £ m Banking, finance, insurance, etc. £6 667 m Letting of property £ m Public administration and defence £ m Education, health and social work £ m Other services £ m

Agriculture, forestry and fishing £8 241 m Mining, energy and water supply £ m Manufacturing £ m Construction £ m Wholesale and retail trade; repairs £ m Hotels and restaurants £29 359m Transport and communication £ m Banking, finance, insurance, etc. £6 667 m Letting of property £ m Public administration and defence £ m Education, health and social work £ m Other services £ m Total GVA £ m

Agriculture, forestry and fishing £8 241 m Mining, energy and water supply £ m Manufacturing £ m Construction £ m Wholesale and retail trade; repairs £ m Hotels and restaurants £29 359m Transport and communication £ m Banking, finance, insurance, etc. £6 667 m Letting of property £ m Public administration and defence £ m Education, health and social work £ m Other services £ m Total GVA £ m 0.9 4.7 17.5 5.4 12.2 3.4 8.0 0.8 24.0 4.8 13.0 5.2 100.0 Percentage of GVA

GDP: the measure of national income Methods of measuring GDP the product approach the income approach the expenditure approach The product approach measuring GVA The income approach

UK GVA by category of income: 2001
Compensation of employees (wages and salaries) £ m Operating surplus (gross profit, rent and interest of firms government and other institutions) £ m Mixed incomes £ m Tax less subsidies on production (other than those on products) plus statistical discrepancy £19 158m

Compensation of employees (wages and salaries) £ m Operating surplus (gross profit, rent and interest of firms government and other institutions) £ m Mixed incomes £ m Tax less subsidies on production (other than those on products) plus statistical discrepancy £19 158m Total GVA £ m

Compensation of employees (wages and salaries) £ m Operating surplus (gross profit, rent and interest of firms government and other institutions) £ m Mixed incomes £ m Tax less subsidies on production (other than those on products) plus statistical discrepancy £19 158m Total GVA £ m 63.6 27.3 6.9 2.2 100.0 Percentage of GVA

GDP: the measure of national income Methods of measuring GDP the product approach the income approach the expenditure approach The product approach measuring GVA The income approach From GVA to GDP

UK GDP (product-based measure): 2001
GVA (gross value added at basic prices) £ m

GVA (gross value added at basic prices) £ m plus Taxes on products £ m

GVA (gross value added at basic prices) £ m plus Taxes on products £ m less Subsidies on products £6 712m

GVA (gross value added at basic prices) £ m plus Taxes on products £ m less Subsidies on products £6 712m GDP (at market prices) £ m

GDP: the measure of national income Methods of measuring GDP the product approach the income approach the expenditure approach The product approach measuring GVA The income approach The expenditure approach

UK GDP by category of expenditure, GNY and NNY: 2001
£million Consumption expenditure of households and NPISH (C) Government final consumption (G) Gross capital formation (I) Exports of goods and services (X) less Imports of goods and services (M)  Statistical discrepancy 499 Gross domestic product (GDP) (at market prices)

GDP: the measure of national income Methods of measuring GDP the product approach the income approach the expenditure approach The product approach measuring GVA The income approach from GVA to GDP From GDP to net national income (NNY)

£million Consumption expenditure of households and NPISH (C) Government final consumption (G) Gross capital formation (I) Exports of goods and services (X) less Imports of goods and services (M)  Statistical discrepancy 499 Gross domestic product (GDP) (at market prices) plus Net income from abroad 5 756 Gross national income (GNY)

£million Consumption expenditure of households and NPISH (C) Government final consumption (G) Gross capital formation (I) Exports of goods and services (X) less Imports of goods and services (M)  Statistical discrepancy 499 Gross domestic product (GDP) (at market prices) plus Net income from abroad 5 756 Gross national income (GNY) less Capital consumption (depreciation) Net national income (NNY)

GDP as a measure of social welfare benefits of using GDP weaknesses The Human Development Index (HDI)

Human Development Index (HDI) for selected countries (2000)

Growth and the Business Cycle
Growth in actual and potential growth Economic growth and the business cycle fluctuations in actual growth

The business cycle National output Time Potential output Actual output

Growth in actual and potential output Economic growth and the business cycle fluctuations in actual growth the phases of the business cycle

The business cycle National output Time Potential output 3 4 2 Actual
1 2 3 4 National output Actual output 3 4 2 1 O Time

Growth in actual and potential output Economic growth and the business cycle fluctuations in actual growth the phases of the business cycle trend growth

The business cycle National output Time Potential output Trend output
Actual output O Time

Growth in actual and potential growth Economic growth and the business cycle fluctuations in actual growth the phases of the business cycle long-term output trend the business cycle in practice

Growth in actual and potential growth Economic growth and the business cycle fluctuations in actual growth the phases of the business cycle long-term output trend the business cycle in practice the irregularity of the cycle

Growth in actual and potential growth Economic growth and the business cycle fluctuations in actual growth the phases of the business cycle long-term output trend the business cycle in practice the irregularity of the cycle the length of the phases

Growth in actual and potential growth Economic growth and the business cycle fluctuations in actual growth the phases of the business cycle long-term output trend the business cycle in practice the irregularity of the cycle the length of the phases the magnitude of the phases

Causes of fluctuations in actual growth aggregate demand aggregate demand relative to potential output Actual growth in practice experience since 1970

Growth rates in selected industrial countries
UK Annual growth rate (%)

UK France Annual growth rate (%)

UK Germany France Annual growth rate (%)

UK Germany France USA Annual growth rate (%)

UK Germany Japan France USA Annual growth rate (%)

Causes of potential growth increases in the quantity of factors capital labour land and raw materials the problem of diminishing returns increases in factor productivity Policies to achieve growth demand-side and supply-side policies market-orientated and interventionist policies

Unemployment The meaning of 'unemployment' The costs of unemployment
Official measures of unemployment claimant unemployment do claimant statistics give a true picture of unemployment? standardised unemployment (ILO / OECD)

Unemployment rates in selected industrial countries
UK

UK France

UK Germany France

UK Germany France USA

UK Germany Japan France USA

UK Germany Japan France USA OECD

Standardised unemployment rates in different sectors of the labour market (2002)

Unemployment Unemployment and the labour market
the aggregate demand and supply of labour equilibrium in the model

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

the aggregate demand and supply of labour equilibrium in the model disequilibrium unemployment

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

the aggregate demand and supply of labour equilibrium in the model disequilibrium unemployment equilibrium unemployment

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

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

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

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

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

Unemployment Disequilibrium unemployment
real-wage (classical) unemployment demand-deficient (cyclical) unemployment unemployment arising from a growth in the labour supply

Unemployment Equilibrium unemployment frictional (search) unemployment
structural unemployment changing pattern of demand technological unemployment regional unemployment seasonal unemployment

Aggregate Demand and Supply
The aggregate demand curve

Aggregate demand and aggregate supply
AD Price level O National output

The aggregate demand curve Why aggregate demand curves slope downwards

The aggregate demand curve Why aggregate demand curves slope downwards import effect

The aggregate demand curve Why aggregate demand curves slope downwards import effect interest-rate effect

The aggregate demand curve Why aggregate demand curves slope downwards import effect interest-rate effect savings effect

The aggregate demand curve Why aggregate demand curves slope downwards import effect interest-rate effect savings effect The aggregate supply curve

AD AS Price level O National output

The aggregate demand curve Why aggregate demand curves slope downwards import effect interest-rate effect savings effect The aggregate supply curve Why aggregate supply curves generally slope upwards

AD AS Price level O National output

The aggregate demand curve Why aggregate demand curves slope downwards import effect interest-rate effect savings effect The aggregate supply curve Why aggregate supply curves generally slope upwards Equilibrium

AS Price level Pe AD O National output

AS Price level Pe b a P2 AD O National output

The aggregate demand curve Why aggregate demand curves slope downwards import effect interest-rate effect savings effect The aggregate supply curve Why AS curves generally slope upwards Equilibrium Effect of a shift in the AD curve

Inflation Defining inflation The costs of inflation
redistribution uncertainty balance of payments resources used to cope with inflation Experience of inflation since 1965

Inflation rates in selected industrial countries
UK

UK EU 15

UK USA EU 15

UK USA EU 15 Japan

UK USA OECD EU 15 Japan

Inflation Types of inflation demand pull

Demand-pull inflation
AS Price level P1 AD1 O Q1 National output

AS Price level P1 AD2 AD1 O Q1 National output

AS Price level P2 Q2 P1 AD2 AD1 O Q1 National output

Inflation Types of inflation demand pull cost push

Inflation Types of inflation demand pull cost push wage push

Inflation Types of inflation demand pull cost push wage push
profit push

Inflation Types of inflation demand pull cost push wage push
profit push import-price push

Cost-push inflation AS1 Price level P1 AD O Q1 National output

Cost-push inflation AS2 AS1 Price level P1 AD O Q1 National output

Cost-push inflation AS2 AS1 AD Price level P2 P1 O Q2 Q1
National output

Inflation Types of inflation demand pull cost push
wage push profit push import-price push the interaction of demand-pull and cost- push inflation

The interaction of demand-pull and cost-push inflation
AS1 Price level P1 AD1 O National output

AS2 AS1 Price level P2 P1 AD2 AD1 O National output

AS3 AS2 AS1 P3 Price level P2 AD3 P1 AD2 AD1 O National output

wage push profit push import-price push structural (demand shift)

wage push profit push import-price push structural (demand shift) expectations and inflation

Inflation Types of inflation Policies to tackle inflation demand pull
cost push wage push profit push import-price push structural (demand shift) expectations and inflation Policies to tackle inflation

cost push wage push profit push import-price push structural (demand shift) expectations and inflation Policies to tackle inflation demand-side policies

cost push wage push profit push import-price push structural (demand shift) expectations and inflation Policies to tackle inflation demand-side policies supply-side policies

Aggregate Demand and Supply and Macroeconomic Problems

Similar presentations

Presentation on theme: "Aggregate Demand and Supply and Macroeconomic Problems"— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

Aggregate Demand and Supply and Macroeconomic Problems

Similar presentations

Presentation on theme: "Aggregate Demand and Supply and Macroeconomic Problems"— Presentation transcript:

Similar presentations

About project

Feedback