1. 1 LECTURE 1 The Circular Flow and National Income Accounting

2. 2 What is Macroeconomics? Macroeconomics - study of the behavior of the economy at the aggregate level; which examines the economy as a whole. Example: Government, household, business sectors, inflation, unemployment etc.

3. 3 The Circular Flow Model

4. 4 Assessing the Economy’s Performance National Income Accounting refers to the measurement of aggregate economic activity, particularly national income and its components. Gross Domestic Product is the total market value of all final goods and services produced in a given year; within a nation’s borders.

5. 5 There are 2 ways of looking at GDP: (a) Spending The expenditures approach (b) Income The income approach

6. 6 The Expenditures Approach Consumption Government spending GDP = C + I + G + Xn Investment Net Exports

7. 7 Consumption (C) – all expenditures by households on durable consumer goods, nondurable consumer goods and consumer expenditures for services. Investment (I) – include all final purchases of machinery, equipment, and tools by business enterprises, all construction and changes in inventories.

8. 8 Government spending (G) – government consumption for: (a) goods and services that government consumes in providing public services; and (b) expenditures for social capital such as schools and highways. Net exports (X n ) – the difference between exports and imports (exports – imports)

9. 9 The Income Approach GDP = Wages + Rents + Interest + Profits + Statistical Adjustments

10. 10 Wages – salaries paid by business and government the their employees. Also include wage and salary supplements such as social welfare insurance and into a variety of private pension, health and welfare funds for workers.

11. 11 Rents – consist of the income received by the households and businesses that supply property resources. They include the monthly payments tenants make to landlords and the lease payments corporations pay for the use of office space.

12. 12 Interest – consists of the money paid by private businesses of the suppliers of money capital. It also includes such items as the interest households receive on savings deposits, certificates of deposit, and corporate bonds.

13. 13 Profits are broken down into 2 accounts: (a) Proprietors’ income, which consists of the net income of sole proprietorships, partnerships, and other unincorporated businesses. (b) Corporate profits: (i) Corporate income taxes (ii) Dividends (iii) Undistributed corporate profits

14. 14 Statistical Adjustments Indirect business taxes – include general sales taxes, excise taxes, business property taxes, license fees and customs duties. Consumption of fixed capital – the useful life of private capital equipment (such as bakery ovens or automobile assembly lines) extend far beyond the year in which they were produced. Net foreign factor income – make a slight adjustment in “national” versus “domestic” income.

15. 15 The Business Cycle Business cycle refers to alternating rises and declines in the level of economic activity, sometimes extending over several years.

16. 16 Nominal GDP vs. Real GDP Nominal GDP – based on the prices that prevailed when the output was produced. Real GDP – based on the number of outputs produced.