1. 7. Aggregate Demand and Supply and Macroeconomic Problems

2. 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 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

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

4. The Circular Flow of Income The inner flow

5. Factor payments Factor payments Consumption of domestically produced goods and services (C d ) Consumption of domestically produced goods and services (C d ) The circular flow of income Firms Households

6. The Circular Flow of Income Withdrawals –net saving –net taxes –import expenditure Injections –investment –government expenditure –export expenditure Withdrawals –net saving –net taxes –import expenditure Injections –investment –government expenditure –export expenditure

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

8. The Circular Flow of Income The relationship between injections and withdrawals –the links between them The relationship between injections and withdrawals –the links between them

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

10. The Circular Flow of Income 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

11. The Circular Flow of Income 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

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

13. The Circular Flow of Income 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 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

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

15. Measuring national income GDP: the measure of national income Methods of measuring GDP –the product approach –the income approach –the expenditure approach The product approach –measuring 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

16. Agriculture, forestry and fishing £9 656 m Mining, energy and water supply £29 485 m Manufacturing £147 306 m Construction £39 262 m Wholesale and retail trade; repairs £89 392 m Hotels and restaurants £23 678m Transport and communication £63 340 m Banking, finance, insurance, etc. £17 737 m Letting of property £159 240 m Public administration and defence £40 495 m Education, health and social work £89 041 m Other services £38 912 m Gross value added (GVA) at basic prices £747 544 m 1.3 3.9 19.7 5.3 12.0 3.2 8.4 2.4 21.3 5.4 11.9 5.2 100.0 Percentage of GVA UK GVA product-based measure: 1998

17. Measuring national income 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 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

18. 62.0 29.9 5.8 2.3 100.0 Compensation of employees (wages and salaries) £463 398 m Operating surplus (gross profit, rent and interest of firms government and other institutions) £223 212 m Mixed incomes £43 379 m Tax less subsidies on production (other than those on products) plus statistical discrepancy £17 555 m Gross value added (GVA) at basic prices £747 544m UK GVA by category of income: 1998 Percentage of GVA

19. Measuring national income 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 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

20. Gross value added (GVA) at basic prices £747 544m UK GDP: 1998

21. Gross value added (GVA) at basic prices £747 544m plus Taxes on products£103 634m UK GDP: 1998

22. Gross value added (GVA) at basic prices £747 544m plus Taxes on products£103 634m less Subsidies on products £7 453m UK GDP: 1998

23. Gross value added (GVA) at basic prices £747 544m plus Taxes on products£103 634m less Subsidies on products £7 453m GDP (at market prices) £843 725m UK GDP: 1998

24. Measuring national income 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 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

25. UK GDP at market prices by category of expenditure: 1998

31. Measuring national income GDP: the measure of national income The product approach The income approach The expenditure approach From GDP to net national income (NNY) GDP: the measure of national income The product approach The income approach The expenditure approach From GDP to net national income (NNY)

32. UK GDP, GNY and NNY at market prices: 1998

34. Economic Growth and the Business Cycle Growth in actual and potential output Economic growth and the business cycle –fluctuations in actual growth Growth in actual and potential output Economic growth and the business cycle –fluctuations in actual growth

35. O National output Time Potential output Actual output The business cycle

36. Economic Growth and the Business Cycle Growth in actual and potential output Economic growth and the business cycle –fluctuations in actual growth –the phases of the business cycle Growth in actual and potential output Economic growth and the business cycle –fluctuations in actual growth –the phases of the business cycle

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

38. Economic Growth and the Business Cycle Growth in actual and potential output Economic growth and the business cycle –fluctuations in actual growth –the phases of the business cycle –trend growth Growth in actual and potential output Economic growth and the business cycle –fluctuations in actual growth –the phases of the business cycle –trend growth

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

40. Economic Growth and the Business Cycle Economic growth and the business cycle –fluctuations in actual growth –the phases of the business cycle –trend growth –the business cycle in practice Economic growth and the business cycle –fluctuations in actual growth –the phases of the business cycle –trend growth –the business cycle in practice

41. Economic Growth and the Business Cycle Economic growth and the business cycle –fluctuations in actual growth –the phases of the business cycle –trend growth –the business cycle in practice the irregularity of the cycle Economic growth and the business cycle –fluctuations in actual growth –the phases of the business cycle –trend growth –the business cycle in practice the irregularity of the cycle

42. Economic Growth and the Business Cycle Economic growth and the business cycle –fluctuations in actual growth –the phases of the business cycle –trend growth –the business cycle in practice the irregularity of the cycle the length of the phases Economic growth and the business cycle –fluctuations in actual growth –the phases of the business cycle –trend growth –the business cycle in practice the irregularity of the cycle the length of the phases

43. Economic Growth and the Business Cycle Economic growth and the business cycle –fluctuations in actual growth –the phases of the business cycle –trend growth –the business cycle in practice the irregularity of the cycle the length of the phases the magnitude of the phases Economic growth and the business cycle –fluctuations in actual growth –the phases of the business cycle –trend growth –the business cycle in practice the irregularity of the cycle the length of the phases the magnitude of the phases

44. Economic Growth and the Business Cycle Causes of actual growth –aggregate demand –aggregate demand relative to potential output Actual growth in practice –experience since 1970 Causes of actual growth –aggregate demand –aggregate demand relative to potential output Actual growth in practice –experience since 1970

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

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

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

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

49. Annual growth rate (%) UK France Germany Growth rates in selected industrial countries

50. Annual growth rate (%) UK France Germany Growth rates in selected industrial countries

51. Annual growth rate (%) UK France USA Germany Growth rates in selected industrial countries

52. Annual growth rate (%) UK France USA Germany Growth rates in selected industrial countries

53. Annual growth rate (%) UK France USA Germany Japan Growth rates in selected industrial countries

54. Annual growth rate (%) UK France USA Germany Japan Growth rates in selected industrial countries

55. Economic Growth and the Business Cycle 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 & interventionist policies 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 & interventionist policies

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

57. Unemployment rates in selected industrial countries UK

58. Unemployment rates in selected industrial countries

59. UK France Unemployment rates in selected industrial countries

60. UK France Unemployment rates in selected industrial countries

61. UK France Germany Unemployment rates in selected industrial countries

62. UK France Germany Unemployment rates in selected industrial countries

63. UK France USA Germany Unemployment rates in selected industrial countries

64. UK France USA Germany Unemployment rates in selected industrial countries

65. UK France USA Germany Japan Unemployment rates in selected industrial countries

66. UK France USA Germany Japan Unemployment rates in selected industrial countries

67. UK France USA Germany Japan OECD Unemployment rates in selected industrial countries

68. UK France USA Germany Japan OECD Unemployment rates in selected industrial countries

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

70. QeQe Aggregate demand and supply of labour O Average (real) wage rate No. of workers AS L AD L WeWe

71. Unemployment Unemployment and the labour market –the aggregate demand and supply of labour –equilibrium in the model –disequilibrium unemployment Unemployment and the labour market –the aggregate demand and supply of labour –equilibrium in the model –disequilibrium unemployment

72. O Average (real) wage rate No. of workers AS L AD L WeWe W2W2 BA Disequilibrium unemployment Q2Q2 Q1Q1

73. Unemployment Unemployment and the labour market –the aggregate demand and supply of labour –equilibrium in the model –disequilibrium unemployment –equilibrium unemployment Unemployment and the labour market –the aggregate demand and supply of labour –equilibrium in the model –disequilibrium unemployment –equilibrium unemployment

74. Equilibrium unemployment O Average (real) wage rate No. of workers AD L WeWe AS L e QeQe

75. Q2Q2 QeQe O Average (real) wage rate No. of workers AS L AD L WeWe N e d Equilibrium unemployment

76. Equilibrium and disequilibrium unemployment O Average (real) wage rate No. of workers AD L WeWe e QeQe AS L

77. O Average (real) wage rate No. of workers AS L AD L WeWe W2W2 ba e Disequilibrium unemployment Equilibrium and disequilibrium unemployment

78. O Average (real) wage rate No. of workers AS L AD L WeWe W2W2 ba e N c Equilibrium unemployment Disequilibrium unemployment Equilibrium and disequilibrium unemployment

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

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

81. Aggregate Demand and Supply The aggregate demand curve

82. O Price level National output AD Aggregate demand and aggregate supply

83. Aggregate Demand and Supply The aggregate demand curve –Why aggregate demand curves slope downwards import effect The aggregate demand curve –Why aggregate demand curves slope downwards import effect

84. O Price level National output AD Aggregate demand and aggregate supply

85. Aggregate Demand and Supply 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

86. O Price level National output AD Aggregate demand and aggregate supply

87. Aggregate Demand and Supply 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

88. O Price level National output AD Aggregate demand and aggregate supply

89. Aggregate Demand and Supply The aggregate demand curve –Why aggregate demand curves slope downwards import effect interest-rate effect savings effect The aggregate supply curve The aggregate demand curve –Why aggregate demand curves slope downwards import effect interest-rate effect savings effect The aggregate supply curve

90. O Price level National output AS AD Aggregate demand and aggregate supply

91. Aggregate Demand and Supply 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 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

92. O Price level National output AS AD Aggregate demand and aggregate supply

93. Aggregate Demand and Supply 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 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

94. O Price level National output AS AD PePe Aggregate demand and aggregate supply

95. O Price level National output AS AD PePe P2P2 a b Aggregate demand and aggregate supply

96. Aggregate Demand and Supply 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 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

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

98. UK Inflation rates in selected industrial countries

99. UK Inflation rates in selected industrial countries

100. UK EU 15 Inflation rates in selected industrial countries

101. UK EU 15 Inflation rates in selected industrial countries

102. UK EU 15 USA Inflation rates in selected industrial countries

103. UK EU 15 USA Inflation rates in selected industrial countries

104. UK EU 15 Japan USA Inflation rates in selected industrial countries

105. UK EU 15 Japan USA Inflation rates in selected industrial countries

106. UK EU 15 Japan USA OECD Inflation rates in selected industrial countries

107. UK EU 15 Japan USA OECD Inflation rates in selected industrial countries

108. Inflation Types of inflation –demand pull Types of inflation –demand pull

109. Demand-pull inflation O Price level National output AS AD 1 P1P1 Q1Q1

110. O Price level National output AS AD 1 P1P1 Q1Q1 AD 2 Demand-pull inflation

111. O Price level National output AS AD 1 P1P1 Q1Q1 AD 2 P2P2 Q2Q2 Demand-pull inflation

112. Inflation Types of inflation –demand pull –cost push Types of inflation –demand pull –cost push

113. Inflation Types of inflation –demand pull –cost push wage push Types of inflation –demand pull –cost push wage push

114. Inflation Types of inflation –demand pull –cost push wage push profit push Types of inflation –demand pull –cost push wage push profit push

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

116. Cost-push inflation O Price level National output AS 1 AD P1P1 Q1Q1

117. O Price level National output AS 1 AD P1P1 Q1Q1 AS 2 Cost-push inflation

118. O Price level National output AS 1 AD P1P1 Q1Q1 AS 2 P2P2 Q2Q2 Cost-push inflation

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

120. The interaction of demand-pull and cost-push inflation O Price level National output AS 1 AD 1 P1P1

121. O Price level National output AS 1 AD 1 P1P1 AS 2 AD 2 P2P2 The interaction of demand-pull and cost-push inflation

122. O Price level National output AS 1 AD 1 P1P1 AD 2 P2P2 AS 3 AD 3 P3P3 AS 2 The interaction of demand-pull and cost-push inflation

123. Inflation Types of inflation –demand pull –cost push wage push profit push import-price push –the interaction of demand-pull and cost- push inflation –structural (demand shift) Types of inflation –demand pull –cost push wage push profit push import-price push –the interaction of demand-pull and cost- push inflation –structural (demand shift)

124. Inflation Types of inflation –demand pull –cost push wage push profit push import-price push –the interaction of demand-pull and cost- push inflation –structural (demand shift) –expectations and inflation Types of inflation –demand pull –cost push wage push profit push import-price push –the interaction of demand-pull and cost- push inflation –structural (demand shift) –expectations and inflation

125. Inflation Policies to tackle inflation –demand-side policies –supply-side policies Policies to tackle inflation –demand-side policies –supply-side policies