MacroEconomics<br />Diagrams and Definitions<br />
What is macroeconomics?<br />Macroeconomics is the study of a national economy.<br />
Macroeconomic Goals<br />
Two Sector Circular Flow of Income<br />Monetary Flow<br />Households<br />RealFlow<br />Good and Services = <br />Output ...
Four Sector Circular Flow of Income<br />Leakages (L)<br />Injections (J)<br />Saving <br />(S)<br />Households<br />Inves...
Measuring National Income<br />Income Method<br />Output Method<br />Households<br />Good and Services<br />Wages, Rent an...
How is national income measured?<br />
How is national output measured?<br />
How is national expenditure measured?<br />
What is GDP?<br />
GDP<br />GDP = Gross Domestic Product = Total Value of all Spending in an Economy = The Total Value of all final Goods and...
GNP<br />GNP = Gross National Product = Total Income Earned by a nation’s factors of production regardless of where the as...
Real GDP<br />Real GDP = Nominal GDP adjusted for inflation<br />
Calculating Real GDP<br />Real GDP = Nominal GDP of year measured<br />
The Uses of National Statistics<br />
Limitations of the Data<br />
What is economic development?<br />Economic Development is a multidimensional concept that includes poverty reduction, pro...
Why GDP fails to accurately measure welfare<br />
Why GDP may understate improvements in welfare<br />
Why GDP may overstate welfare<br />
How can development be measured?<br />GDP per capita<br />Human Development Index<br />	Aims to stress the human dimension...
How can development be measured?<br />
How is the HDI determined?<br />
How can development be measured?<br />
Developing and Developed <br />
How can development be measured?<br />Important Indicators of development<br />Infant mortality rate<br />Maternal mortali...
Macroeconomic Models<br />
What is aggregate demand (AD)?<br />Aggregate Demand is the aggregate (total) spending on goods and service in a period of...
What are the components of AD?<br />C =	all household consumption on durables, non-durables and services<br />I =  firm’s ...
What causes shifts in AD?<br />
What causes Changes in Consumption?<br />AD<br />AD<br />AD<br />AD<br />32<br />
What causes Changes in Consumption?  <br />AD<br />AD<br />AD<br />AD<br />33<br />
What causes Changes in Consumption? <br />AD<br />AD<br />AD<br />AD<br />34<br />
What causes Changes in Investment?<br />AD<br />AD<br />35<br />
Demand for investment funds?<br />
What causes Changes in Investment? <br />AD<br />AD<br />AD<br />AD<br />37<br />
What causes Changes in Investment?  <br />AD<br />AD<br />AD<br />AD<br />38<br />
What causes Changes in Investment?<br />AD<br />AD<br />39<br />
What causes Changes in Government Spending? <br />AD<br />AD<br />AD<br />AD<br />40<br />
What causes Changes in Export and iMport spending?<br />AD<br />AD<br />41<br />
What causes Changes in Export and iMport spending?<br />AD<br />AD<br />AD<br />AD<br />42<br />
What is aggregate supply (AS)?<br />Aggregate(total) Supply isamount of goods and services that all industries will produc...
What is aggregate supply in the short run (SRAS)?<br />
What are the components of AS?<br />
What causes shifts in SRAS?<br />
What causes shifts in SRAS? <br />AS<br />AS<br />AS<br />AS<br />47<br />
What causes shifts in SRAS? <br />AS<br />AS<br />AS<br />AS<br />48<br />
What causes supply shocks? <br />AS<br />AS<br />49<br />
Macroeconomic Equilibrium<br />
Shifts in AD<br />
Shifts in SRAS<br />
The Business Cycle<br />Fluctuations in the growth of real output, consisting of periods of expansion and contraction call...
Business Cycle<br />
Business Cycle: Expansion<br />
Business Cycle: Peak<br />
Business Cycle: Contraction<br />
Business Cycle: Trough<br />
Relationship between real GDP and Employment<br />59<br />
Using Diagrams to Illustrate Macroeconomic Goals <br />
Using Diagrams to Illustrate Macroeconomic Goals <br />
Changes in SR Equilibrium    <br />
Changes in AD <br />
Changes in SRAS <br />
Economic  Scenarios  <br />
Deflationary (recessionary) gap <br />
Recession <br />A recession is when the economy experiences two consecutive quarters of falling GDP.<br />
Inflationary gap <br />
Full employment level of output <br />
Causes of  Business Cycle   <br />
Changes in AD <br />
Changes in AS <br />
What is the neoclassical perspective?<br />
The Neoclassical LRAS<br />
Neoclassical (Free Market)  LRAS <br />LRAS perfectly inelastic at Full Employment Level of Output (Ymax)<br />Potential O...
Why is the LRAS vertical?<br />
Implications of the neoclassical LRAS?<br />
Long-run equilibrium <br />
Long-run equilibrium and Decline in AD <br />
Return to Long-run equilibrium <br />
Long-run equilibrium <br />
Long-run equilibrium and Increase in AD <br />
Return to Long-run equilibrium <br />
What is the Keynesian perspective?<br />
The Keynesian SR/LRAS?<br />
 Keynesian SR/LRAS<br />
 Keynesian SR/LRAS<br />Keynes argued that as there is nothing inherent in the economy to move the SR into the LR, then SR...
Inflationary Gap in the Keynesian Perspective<br />
Full Employment Equilibrium in the Keynesian Perspective<br />
Economic Growth: Improved Quantity & Quality of FOPs <br />
Economic Growth: Neoclassical Perspective <br />
Economic Growth: Keynesian Perspective<br />
Policy Alternatives to Manage the Economy<br />
Expansionary Policies (in recession)<br />
Contractionary  Policies (in inflation)<br />
Strengths of Fiscal Policy<br />
Weaknesses of Fiscal Policy<br />
Strengths of Monetary Policy<br />
Weaknesses of Monetary Policy<br />
The Neoclassical/Monetarist Challenge<br />Argument that discretionary fiscal polices that try to stabilize the economy ar...
Supply-side Policies<br />
Market-orientated Policies<br />
Market-orientated Supply-side Policies: Objectives<br />
Reduce Government Sector: Pros and Cons<br />
Make labor more responsive to supply and demand : Pros and Cons<br />
Government policies to improve industry: Pros and Cons<br />
Shifting the SRAS and the LRAS in the AS-AD Model<br />
The Multiplier Effect<br />
Marginal Propensity<br />
Example of the Multiplier in Effect<br />Assumption 60% of additional income spent on Consumption (MPC = 0.6)<br />The Mul...
The Multiplier Effect<br />
The Accelerator Theory & the Combined multiplier/accelerator effect<br />Argues that small changes in GDP produces larger ...
Crowding-out Effect<br />
Crowding-out Effect<br />
Crowding-out Effect<br />
Unemployment and Inflation<br />
Unemployment<br />
Economy at Potential <br />
Types of Unemployment <br />
Keynesian Remedy for Unemployment During a Recession<br />
Neoclassical Remedy for Unemployment During a Recession<br />
Real Wage Unemployment<br />
Eliminating Cyclical (Demand-deficient) Unemployment<br />
Inflation and Deflation<br />
Inflation & Deflation<br />
Demand-pull Inflation<br />
Cost-push Inflation<br />
Stakeholders and Inflation<br />
“Good” Deflation<br />
Measuring Inflation<br />The consumer price index (CPI)  compares the value of a basket of goods and services in one year ...
Problems Measuring Inflation<br />
The Phillips Curve<br />
NRU = NAIRU<br />If governments avoid demand-side expansionary policies Non-accelerating inflation rate of unemployment is...
Long-run Phillips Curve<br />
Phillips Curve<br />
Phillips Curve<br />
Neo-classical challenge to the Phillips Curve<br />
LR Phillips Curve<br />If expansionary policies adopted, inflation would  increase to 4% or more. <br />Real wages have fa...
LR Phillips Curve<br />Unemployment is now below NRU at 4%. (b)<br />Workers have fallen for the “money illusion” and slow...
LR Phillips Curve<br />Unemployment is now below NRU at 4%. (b)<br />Workers have fallen for the “money illusion” and slow...
LR Phillips Curve<br />Once workers realize real wages have fallen they will demand at least a 4% pay rise. <br />Real wag...
LR Phillips Curve<br />Any attempt to to increase AD will only result in temporary changes to unemployment but increasingl...
LR Phillips Curve<br />Friedman argued that no trade off exists if governments do not use demand side policies.<br />
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Macro diagrams and definitions

  1. 1. MacroEconomics<br />Diagrams and Definitions<br />
  2. 2. What is macroeconomics?<br />Macroeconomics is the study of a national economy.<br />
  3. 3. Macroeconomic Goals<br />
  4. 4. Two Sector Circular Flow of Income<br />Monetary Flow<br />Households<br />RealFlow<br />Good and Services = <br />Output (O)<br />Expenditure <br />on Goods and Services<br />(E)<br />Wages, Rent and Profits<br />(Y)<br />Factors of Production<br />Firms<br />E = O = Y<br />4<br />
  5. 5. Four Sector Circular Flow of Income<br />Leakages (L)<br />Injections (J)<br />Saving <br />(S)<br />Households<br />Investments<br />(I)<br />Income<br />Exports<br />(X)<br />Imports<br /> (M)<br />Government<br />Spending (G)<br />Expenditure<br />Taxes<br />(T)<br />Firms<br />O = E = Y<br />5<br />Sum J = Sum L<br />
  6. 6. Measuring National Income<br />Income Method<br />Output Method<br />Households<br />Good and Services<br />Wages, Rent and Profits<br />Expenditure <br />on Goods and Services<br />Factors of Production<br />Firms<br />Expenditure Method<br />6<br />
  7. 7. How is national income measured?<br />
  8. 8. How is national output measured?<br />
  9. 9. How is national expenditure measured?<br />
  10. 10. What is GDP?<br />
  11. 11. GDP<br />GDP = Gross Domestic Product = Total Value of all Spending in an Economy = The Total Value of all final Goods and Services in an Economy regardless of who owns the productive assets.<br />GDP = C + I + G + (X – M)<br />
  12. 12. GNP<br />GNP = Gross National Product = Total Income Earned by a nation’s factors of production regardless of where the assets are located<br />
  13. 13. Real GDP<br />Real GDP = Nominal GDP adjusted for inflation<br />
  14. 14. Calculating Real GDP<br />Real GDP = Nominal GDP of year measured<br />
  15. 15. The Uses of National Statistics<br />
  16. 16. Limitations of the Data<br />
  17. 17. What is economic development?<br />Economic Development is a multidimensional concept that includes poverty reduction, provision of education, health care and law and order, civil liberties and civic participation.<br />
  18. 18. Why GDP fails to accurately measure welfare<br />
  19. 19. Why GDP may understate improvements in welfare<br />
  20. 20. Why GDP may overstate welfare<br />
  21. 21. How can development be measured?<br />GDP per capita<br />Human Development Index<br /> Aims to stress the human dimension of economic growth<br />
  22. 22. How can development be measured?<br />
  23. 23. How is the HDI determined?<br />
  24. 24. How can development be measured?<br />
  25. 25. Developing and Developed <br />
  26. 26. How can development be measured?<br />Important Indicators of development<br />Infant mortality rate<br />Maternal mortality ratio<br />Enrolment in each level of education<br />Literacy <br />Internet users per 1000<br />
  27. 27. Macroeconomic Models<br />
  28. 28. What is aggregate demand (AD)?<br />Aggregate Demand is the aggregate (total) spending on goods and service in a period of time at a given price level.<br />
  29. 29.
  30. 30. What are the components of AD?<br />C = all household consumption on durables, non-durables and services<br />I = firm’s replacement investment(spending on capital to maintain productivity) or induced investment to increase production<br />G = all government spending <br />X-M = spending by foreigners on exports less domestic spending on imports <br />
  31. 31. What causes shifts in AD?<br />
  32. 32. What causes Changes in Consumption?<br />AD<br />AD<br />AD<br />AD<br />32<br />
  33. 33. What causes Changes in Consumption? <br />AD<br />AD<br />AD<br />AD<br />33<br />
  34. 34. What causes Changes in Consumption? <br />AD<br />AD<br />AD<br />AD<br />34<br />
  35. 35. What causes Changes in Investment?<br />AD<br />AD<br />35<br />
  36. 36. Demand for investment funds?<br />
  37. 37. What causes Changes in Investment? <br />AD<br />AD<br />AD<br />AD<br />37<br />
  38. 38. What causes Changes in Investment? <br />AD<br />AD<br />AD<br />AD<br />38<br />
  39. 39. What causes Changes in Investment?<br />AD<br />AD<br />39<br />
  40. 40. What causes Changes in Government Spending? <br />AD<br />AD<br />AD<br />AD<br />40<br />
  41. 41. What causes Changes in Export and iMport spending?<br />AD<br />AD<br />41<br />
  42. 42. What causes Changes in Export and iMport spending?<br />AD<br />AD<br />AD<br />AD<br />42<br />
  43. 43. What is aggregate supply (AS)?<br />Aggregate(total) Supply isamount of goods and services that all industries will produce at a given price level.<br />
  44. 44. What is aggregate supply in the short run (SRAS)?<br />
  45. 45. What are the components of AS?<br />
  46. 46. What causes shifts in SRAS?<br />
  47. 47. What causes shifts in SRAS? <br />AS<br />AS<br />AS<br />AS<br />47<br />
  48. 48. What causes shifts in SRAS? <br />AS<br />AS<br />AS<br />AS<br />48<br />
  49. 49. What causes supply shocks? <br />AS<br />AS<br />49<br />
  50. 50. Macroeconomic Equilibrium<br />
  51. 51. Shifts in AD<br />
  52. 52. Shifts in SRAS<br />
  53. 53. The Business Cycle<br />Fluctuations in the growth of real output, consisting of periods of expansion and contraction called business cycles or trade cycles.<br />
  54. 54. Business Cycle<br />
  55. 55. Business Cycle: Expansion<br />
  56. 56. Business Cycle: Peak<br />
  57. 57. Business Cycle: Contraction<br />
  58. 58. Business Cycle: Trough<br />
  59. 59. Relationship between real GDP and Employment<br />59<br />
  60. 60. Using Diagrams to Illustrate Macroeconomic Goals <br />
  61. 61. Using Diagrams to Illustrate Macroeconomic Goals <br />
  62. 62. Changes in SR Equilibrium <br />
  63. 63. Changes in AD <br />
  64. 64. Changes in SRAS <br />
  65. 65. Economic Scenarios <br />
  66. 66. Deflationary (recessionary) gap <br />
  67. 67. Recession <br />A recession is when the economy experiences two consecutive quarters of falling GDP.<br />
  68. 68. Inflationary gap <br />
  69. 69. Full employment level of output <br />
  70. 70. Causes of Business Cycle <br />
  71. 71. Changes in AD <br />
  72. 72. Changes in AS <br />
  73. 73. What is the neoclassical perspective?<br />
  74. 74. The Neoclassical LRAS<br />
  75. 75. Neoclassical (Free Market) LRAS <br />LRAS perfectly inelastic at Full Employment Level of Output (Ymax)<br />Potential Output = Quantity and Quality of FOPs not Price<br />
  76. 76. Why is the LRAS vertical?<br />
  77. 77. Implications of the neoclassical LRAS?<br />
  78. 78. Long-run equilibrium <br />
  79. 79. Long-run equilibrium and Decline in AD <br />
  80. 80. Return to Long-run equilibrium <br />
  81. 81. Long-run equilibrium <br />
  82. 82. Long-run equilibrium and Increase in AD <br />
  83. 83. Return to Long-run equilibrium <br />
  84. 84. What is the Keynesian perspective?<br />
  85. 85. The Keynesian SR/LRAS?<br />
  86. 86. Keynesian SR/LRAS<br />
  87. 87. Keynesian SR/LRAS<br />Keynes argued that as there is nothing inherent in the economy to move the SR into the LR, then SRAS = LRAS<br />NB <br />In diagrams taking a Keynesian you may see the AS curve labeled Keynesian AS or simply LRAS as long as the diagram’s title makes clear which perspective is being adopted <br />
  88. 88. Inflationary Gap in the Keynesian Perspective<br />
  89. 89. Full Employment Equilibrium in the Keynesian Perspective<br />
  90. 90. Economic Growth: Improved Quantity & Quality of FOPs <br />
  91. 91. Economic Growth: Neoclassical Perspective <br />
  92. 92. Economic Growth: Keynesian Perspective<br />
  93. 93. Policy Alternatives to Manage the Economy<br />
  94. 94. Expansionary Policies (in recession)<br />
  95. 95. Contractionary Policies (in inflation)<br />
  96. 96. Strengths of Fiscal Policy<br />
  97. 97. Weaknesses of Fiscal Policy<br />
  98. 98. Strengths of Monetary Policy<br />
  99. 99. Weaknesses of Monetary Policy<br />
  100. 100. The Neoclassical/Monetarist Challenge<br />Argument that discretionary fiscal polices that try to stabilize the economy are so flawed that they actually cause instability<br />Alternative policies<br />Ensure steady supply of money<br />Ensure price and wage flexibility<br />Focus on supply-side policies to achieve economic growth<br />
  101. 101. Supply-side Policies<br />
  102. 102. Market-orientated Policies<br />
  103. 103. Market-orientated Supply-side Policies: Objectives<br />
  104. 104.
  105. 105. Reduce Government Sector: Pros and Cons<br />
  106. 106.
  107. 107. Make labor more responsive to supply and demand : Pros and Cons<br />
  108. 108.
  109. 109. Government policies to improve industry: Pros and Cons<br />
  110. 110. Shifting the SRAS and the LRAS in the AS-AD Model<br />
  111. 111. The Multiplier Effect<br />
  112. 112. Marginal Propensity<br />
  113. 113. Example of the Multiplier in Effect<br />Assumption 60% of additional income spent on Consumption (MPC = 0.6)<br />The Multiplier = 1/1-MPC<br />
  114. 114. The Multiplier Effect<br />
  115. 115. The Accelerator Theory & the Combined multiplier/accelerator effect<br />Argues that small changes in GDP produces larger changes in investment spending. <br />These fluctuations interact with the Multiplier effect to increase the momentum of business cycle.<br />
  116. 116. Crowding-out Effect<br />
  117. 117. Crowding-out Effect<br />
  118. 118. Crowding-out Effect<br />
  119. 119. Unemployment and Inflation<br />
  120. 120. Unemployment<br />
  121. 121.
  122. 122.
  123. 123. Economy at Potential <br />
  124. 124. Types of Unemployment <br />
  125. 125. Keynesian Remedy for Unemployment During a Recession<br />
  126. 126. Neoclassical Remedy for Unemployment During a Recession<br />
  127. 127. Real Wage Unemployment<br />
  128. 128. Eliminating Cyclical (Demand-deficient) Unemployment<br />
  129. 129. Inflation and Deflation<br />
  130. 130. Inflation & Deflation<br />
  131. 131. Demand-pull Inflation<br />
  132. 132. Cost-push Inflation<br />
  133. 133.
  134. 134. Stakeholders and Inflation<br />
  135. 135.
  136. 136. “Good” Deflation<br />
  137. 137. Measuring Inflation<br />The consumer price index (CPI) compares the value of a basket of goods and services in one year with a same basket in the base year. <br />
  138. 138. Problems Measuring Inflation<br />
  139. 139. The Phillips Curve<br />
  140. 140. NRU = NAIRU<br />If governments avoid demand-side expansionary policies Non-accelerating inflation rate of unemployment is achieved (NAIRU)<br />
  141. 141. Long-run Phillips Curve<br />
  142. 142. Phillips Curve<br />
  143. 143. Phillips Curve<br />
  144. 144. Neo-classical challenge to the Phillips Curve<br />
  145. 145. LR Phillips Curve<br />If expansionary policies adopted, inflation would increase to 4% or more. <br />Real wages have fallen and firms hire additional labor. <br />
  146. 146. LR Phillips Curve<br />Unemployment is now below NRU at 4%. (b)<br />Workers have fallen for the “money illusion” and slow to realize that real wages have fallen because inflation is actually over 4%. <br />
  147. 147. LR Phillips Curve<br />Unemployment is now below NRU at 4%. (b)<br />Workers have fallen for the “money illusion” and slow to realize that real wages have fallen because inflation is actually over 4%. <br />
  148. 148. LR Phillips Curve<br />Once workers realize real wages have fallen they will demand at least a 4% pay rise. <br />Real wages will return to previous levels and firm will fire workers.<br />Unemployment has returned to (c) <br />
  149. 149. LR Phillips Curve<br />Any attempt to to increase AD will only result in temporary changes to unemployment but increasingly high rates of inflation<br />
  150. 150. LR Phillips Curve<br />Friedman argued that no trade off exists if governments do not use demand side policies.<br />
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