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Economics for Management
GSB728
Topic 7:
National Income and Accounting

1
Note: This lecture note was prepared
based on the teaching material provided
by the publisher of the textbook Principles
o...
Learning Objectives
1. Macroeconomic issues – What are the major issues in
the economy as a whole?

2. The circular flow o...
Macroeconomic Issues
• Microeconomics focuses on individual markets
while macroeconomics examine the economy as a
whole.

...
Macroeconomic Issues (contd.)
– Unemployment: ‘People of working age who are
without work, but want to work and are availa...
Macroeconomic Issues (contd.)
– Balance of payments: Record of all transactions
between a country and the rest of the worl...
Macroeconomic Issues (contd.)
– Macroeconomic objectives:
• High and sustainable economic growth.

• Low unemployment.
• L...
Circular Flow of Income
– The four macroeconomic objectives are linked.
– Aggregate demand can be expressed in the form
of...
Circular Flow of Income (contd.)
• The inner flow, withdrawals and injections
– The inner flow is presented in the next sl...
Inner Flow of Income
Firms

Consumption of
domestically
produced goods
and services (Cd)

Factor
Payments

Households
Sour...
Circular Flow of Income (contd.)
– Withdrawals (W):
• Net saving (S)
• Net taxes (T)
• Import expenditure (M)

W=S+T+M
– I...
Inner Flow of Income, Withdrawals and
Injections
Injections

I

Factor
Payments

Cd

G

BANKS
S

X

GOVT
T

ABROAD
M

With...
Circular Flow of Income (contd.)
– The circular flow and the four macroeconomic
objectives:
• When aggregate demand rises:...
Economic Growth and the
Business Cycle
• The distinction between actual and potential
growth:
• Actual growth: Percentage ...
Economic Growth and the
Business Cycle (contd.)
• Economic growth and the business cycle:
– Business cycle or trade cycle:...
National output

The Business Cycle
Potential
output

Actual
output

0
Source: Sloman et al. (2014).

Time

16
National output

The Business Cycle (contd.)
Potential
output

3

Actual
output

4
2

3

2

4

1
Boom
0
Source: Sloman et ...
Economic Growth and the
Business Cycle (contd.)
– Long-term output trend.

18
The Business Cycle (contd.)
Potential
output

National output

Trend
output
Actual
output

0
Source: Sloman et al. (2014)....
Economic Growth and the
Business Cycle (contd.)
– Business cycle in practice – Irregularity of the
cycle:
• Length of the ...
Annual growth rate (%)

Economic Growth in Australia,
1985-2006

Source: Sloman et al. (2014).
Economic Growth and the
Business Cycle (contd.)
• Causes of fluctuations in actual growth:

– Short-run:
• Growth in aggre...
Economic Growth and the
Business Cycle (contd.)
• Policies to achieve growth:
– Demand-side:
• Create sufficient aggregate...
Economic Growth and the
Business Cycle (contd.)
• Benefits of economic growth:
• Increased consumption.

• Easier to redis...
Economic Growth and the
Business Cycle (contd.)
• Costs of economic growth:
• Growth may simply generate extra demands.
• ...
Unemployment
• The meaning of ‘unemployment’:
• Number of unemployed.
• Labour force.

• Unemployment rate.

• The costs o...
Inflation
• The costs of inflation:
– Menu costs: Associated with having to adjust price
lists or labels.
– Redistribution...
Inflation (contd.)
• The causes of inflation:
– Demand-pull inflation: Caused by persistent
rises in aggregated demand.
– ...
References
Morales, L. E., Simons, P. and Valle de Souza, S.
(2014). GSB728: Economics for Management
[Topic Notes]. Armid...
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Gsb728 lecture note topic 4a

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Transcript of "Gsb728 lecture note topic 4a"

  1. 1. Economics for Management GSB728 Topic 7: National Income and Accounting 1
  2. 2. Note: This lecture note was prepared based on the teaching material provided by the publisher of the textbook Principles of Economics. 2
  3. 3. Learning Objectives 1. Macroeconomic issues – What are the major issues in the economy as a whole? 2. The circular flow of income – Why does money go round and round from firms to consumers and back again? 3. Economic growth and the business cycle - Is a country’s economic growth likely to be constant over time? 4. Unemployment – If people want to consume more goods, why are so many people out of work? 5. Inflation – The tendency for prices to rise. 3
  4. 4. Macroeconomic Issues • Microeconomics focuses on individual markets while macroeconomics examine the economy as a whole. • The major macroeconomic issues: – Gross Domestic Product (GDP): • Nominal GDP: Value of the flow of final goods and services produced over a 12 months period at current prices. • Real GDP: Nominal GDP adjusted for inflation. – Economic growth: • Rate of economic growth: Percentage increase in real GDP over a 12 months period. 4
  5. 5. Macroeconomic Issues (contd.) – Unemployment: ‘People of working age who are without work, but want to work and are available for work at current wage rates’. • Unemployment rate: Number of unemployed people as a percentage of the labour force. – Inflation: Persistent rise in the general level of prices of all goods and services. • Rate of inflation: Annual percentage increase in the price level. 5
  6. 6. Macroeconomic Issues (contd.) – Balance of payments: Record of all transactions between a country and the rest of the world. • Current account: Record of a country’s imports and exports of goods and services, plus direct flows of income or payments. • Capital account: Record of transactions between domestic and foreign residents that involve the acquisition of either an asset or liability. • Financial account: Part of the capital account, which includes the foreign investment. CAB + KAB = 0 6
  7. 7. Macroeconomic Issues (contd.) – Macroeconomic objectives: • High and sustainable economic growth. • Low unemployment. • Low inflation. • Satisfactory balance of payments. 7
  8. 8. Circular Flow of Income – The four macroeconomic objectives are linked. – Aggregate demand can be expressed in the form of this equation: AD = C + I + G + X – M Where AD is aggregate demand; C is consumption of goods and services; I is investment expenditure; G is government expenditure; X is exports, other countries’ expenditure of our domestically-produced goods and services; and M is imports, our expenditure on other countries’ goods and services. 8
  9. 9. Circular Flow of Income (contd.) • The inner flow, withdrawals and injections – The inner flow is presented in the next slide. 9
  10. 10. Inner Flow of Income Firms Consumption of domestically produced goods and services (Cd) Factor Payments Households Source: Sloman et al. (2014). 10
  11. 11. Circular Flow of Income (contd.) – Withdrawals (W): • Net saving (S) • Net taxes (T) • Import expenditure (M) W=S+T+M – Injections (J): • Investment (I) • Government expenditure (G) • Export expenditure (X) J=I+G+X 11
  12. 12. Inner Flow of Income, Withdrawals and Injections Injections I Factor Payments Cd G BANKS S X GOVT T ABROAD M Withdrawals Source: Sloman et al. (2014). 12
  13. 13. Circular Flow of Income (contd.) – The circular flow and the four macroeconomic objectives: • When aggregate demand rises:  Economic growth occurs.  Unemployment rate falls.  Inflation tends to rise.  Imports tend to rise, exports tend to fall. – Equilibrium in the circular flow is achieved when injections equalise withdrawals. 13
  14. 14. Economic Growth and the Business Cycle • The distinction between actual and potential growth: • Actual growth: Percentage annual increase in national output actually produced. • Potential growth: Percentage annual increase in the capacity of the economy to produce. The rate of growth of potential output. • Potential output: Output that could be produced in the economy if there was a full employment of resources (including labour). 14
  15. 15. Economic Growth and the Business Cycle (contd.) • Economic growth and the business cycle: – Business cycle or trade cycle: Periodic fluctuations of national output around its long-term trend. – There are fluctuations in actual growth, characterised by the phases of the business cycle: • Upturn: A stagnant economy begins to recover and growth in actual output. • Expansion: Rapid economic growth (the economy is booming). • Peaking Out: Growth slows down or even ceases. • Slowdown, Recession or Slump: No growth or decline in output. 15
  16. 16. National output The Business Cycle Potential output Actual output 0 Source: Sloman et al. (2014). Time 16
  17. 17. National output The Business Cycle (contd.) Potential output 3 Actual output 4 2 3 2 4 1 Boom 0 Source: Sloman et al. (2014). Upturn 1 Peak Recession Time 17
  18. 18. Economic Growth and the Business Cycle (contd.) – Long-term output trend. 18
  19. 19. The Business Cycle (contd.) Potential output National output Trend output Actual output 0 Source: Sloman et al. (2014). Time 19
  20. 20. Economic Growth and the Business Cycle (contd.) – Business cycle in practice – Irregularity of the cycle: • Length of the phases. • Magnitude of the phases. 20
  21. 21. Annual growth rate (%) Economic Growth in Australia, 1985-2006 Source: Sloman et al. (2014).
  22. 22. Economic Growth and the Business Cycle (contd.) • Causes of fluctuations in actual growth: – Short-run: • Growth in aggregate demand: It will create shortages and will stimulate firms to increase output. – Long-run: • Growth in aggregate demand. • Growth in potential output. 22
  23. 23. Economic Growth and the Business Cycle (contd.) • Policies to achieve growth: – Demand-side: • Create sufficient aggregate demand. – Supply-side: • Increasing potential output: – Research and development. – Innovation. – Training. 23
  24. 24. Economic Growth and the Business Cycle (contd.) • Benefits of economic growth: • Increased consumption. • Easier to redistribute income to the poor. • Can afford to care more for the environment. 24
  25. 25. Economic Growth and the Business Cycle (contd.) • Costs of economic growth: • Growth may simply generate extra demands. • Social effects. • Environmental costs. • Non-renewable resources. • Effects on income distribution. 25
  26. 26. Unemployment • The meaning of ‘unemployment’: • Number of unemployed. • Labour force. • Unemployment rate. • The costs of unemployment: • To the person unemployed. • To family and friends of the unemployed. • To the economy. 26
  27. 27. Inflation • The costs of inflation: – Menu costs: Associated with having to adjust price lists or labels. – Redistribution: Those on fixed incomes and in a weak bargaining position will be affected. – Uncertainty and lack of investment. – Worsen the balance of payments: Exports will become less competitive in world markets. – Resources used to cope with inflation: Accountants and other financial experts may have to be employed by companies to help them to cope with the uncertainties caused by inflation. 27
  28. 28. Inflation (contd.) • The causes of inflation: – Demand-pull inflation: Caused by persistent rises in aggregated demand. – Cost-push inflation: Caused by persistent rises in the costs of production (independent of demand). 28
  29. 29. References Morales, L. E., Simons, P. and Valle de Souza, S. (2014). GSB728: Economics for Management [Topic Notes]. Armidale, Australia: University of New England, Graduate School of Business. Sloman, J., Norris, K and Garratt, D. (2014). Principles of Economics (4th ed.). French Forest, Australia: Pearson. 29
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