3.1 Intro To Macro And Measuring Gdp

By the end of this first unit your should be able to understand… Circular flow diagram of an economy 1. including households and firms 2. List the five main Macro Economic goals 3. Measure the value of economy using Gross Domestic Product

Circular flow diagram helps us understand how the  economy works. We can use the diagram to show the how  ‘economic things’ move around. Things that move around our economy are either  real or money flows. A money flow is usually in exchange for a real flow. Physical or Real flows: Money Flows:

Two central parts to the model are  households and producers Households are: Producers or firms are:

Consumption Spending (C) Goods and Services Households Firms Types of Resources Income (Y)

Savings are: Investment is:

Quick Test: Complete the  following table by indicating which flows are › Real flows › Money flows Flows Real or Money? Consumer Goods Salaries Labour Consumption expenditure Profit BK Whopper Burger

Quick Test: Using the concept of  money flows can you describe the interdependence between households and producers? Interdependence: Individuals, groups and producers relying on each other to provide what they are no longer able to produce for themselves. Specialisation results in need for interdependence and a need for trade

Investment (I) Financial Sector Savings (s) Consumption Spending (C) Goods and Services Firms Households Types of Resources Income (Y)

Households Savings Investment Import Export income Expenditure Payments Receipts Taxes Government Firms Spending withdrawals injections

Quick Test: Complete the following table by  indicating which flows are › Savings (S) a withdrawal from circular flow › Investment (I) an injection to circular flow Flows S or I Depositing money in the bank Firm buys a new truck Workers buying shares in the company they work for Increasing the capital goods a firm has Building a new factory

Explain using the model what the effect of 1. increased consumer savings would have on the circular flow model? Explain using the model explain what the 2. effect of an increase in direct income taxation would have on two different sectors. Explain using the model that effect of 3. increased exports to Australia due to a free trade deal would have on one other sector of the economy. Discuss as group but write into your book

Letter from Circular Flow Diagram? Unemployment benefit payment Receipts from dairy product exports Factory worker wages Consumer make deposit in bank account GST payments Teacher salaries Employees investing in own business International students paying fees to NZ universities.

Injections Withdrawals X M G S I T

M = Import Payments IT = Direct Income Taxation X = Export Receipts G = Government Spending Y = Compensation to Employees Tr = Transfer Payments S = Private Savings T = Taxes on production C = Final Household Consumption Spending I = Gross Fixed Capital Formation

Measuring Gross Domestic Product using basic expenditure approach C + I + G + ( X – M) = GDP 75 + 26 + 20 + (41-39) = $123 billion M = Import Payments IT = Direct Income Taxation X = Export Receipts G = Government Spending Y = Compensation to Employees Tr = Transfer Payments S = Private Savings T = Taxes on production C = Final Household Consumption Spending I = Gross Fixed Capital Formation

M G Income C Expenditure X I ∆R C + I + G + ΔR ( X – M) = GDP Expenditure Approach Compensation of Employees + Gross Operating Surplus + (taxes – subsidies) Income Approach

This is a way of measuring national income  by either the expenditure, incomes or production approach. GDP = C + I + G + ( X – M )  GDP per capita = GDP / population  GDP is also called Aggregate Demand  (AD) total demand in the whole economy GDP nominal (per capita) 

Investment is defined as “the addition of capital stocks  to the economy by firms”. Capital stocks are man made products which produce other products, factories, trucks, machinery. › Replacement Investment – occurs when firms spend on capital in order to maintain stocks of capital. e.g purchasing a new computer to replace old one (depreciation) › Induced capital – firms spending to increase their output and productivity eg. Purchasing a new room of 20 computers to increase productivity Investment Productivity Output Purchasing new capital Amount of output Will increase and assets produced per worker average cost will fall

Current Prices - P Current Production Nominal GDP Year (Nominal Prices) Q X = 1 Current Prices - P Current Production Year Nominal GDP X = (Nominal Prices) Q 2 Current Production Real Prices - P Real GDP Year Q (Nominal - Inflation) X = 1 Real GDP is adjusted for the changes in prices and reflects the true value of Gross Domestic Product

Overall prices in the market have increased,  rather than the price in one or two markets. The average of all prices has increased.  Inflation Deflation A rise in the general A fall in the general level level of prices overtime of prices overtime Disinflation Occurs where the rate of inflation is falling. Price level is rising but by smaller amounts than before

Inflation   Deflation +  Disinflation Inflation Disinflation Percentage Time change in the price level Deflation -

A simple index showing the change in prices. 2004 2005 2006 Pie 2.00 2.00 2.50 Custard Square 1.00 1.50 1.50 Current nominal expenditure Juice 0.80 0.80 1.20 INDEX = X 1000 Base year nominal expenditure Moosie 0.80 0.80 0.90 Total Expenditure Index Number 1000 Total Expenditure 2005 5.10 Index for 2005 = = X 1000 = 1108 Total Expenditure 2004 4.60

A simple index showing the change in prices. 2004 2005 2006 Pie 2.00 2.00 2.50 Wedges 1.00 1.50 1.50 Current nominal expenditure Juice 0.80 0.80 1.20 INDEX = X 1000 Base year nominal expenditure Lollies 0.80 0.80 0.90 Total Expenditure 4.60 5.10 6.10 Index Number 1000 1108 1326 Total Expenditure 2005 5.10 Index for 2005 = = X 1000 = 1108 Total Expenditure 2004 4.60

A simple index showing the change in prices. 2004 2005 2006 Index Number 1000 1108 1326 Inflation - the average price level has increased by ____% between 2005 and 2006 2006 Difference between index numbers 1326 - 1108 = X 100 = 19.6 % Inflation = Previous index number 1108 Rate

Nominal GDP Real GDP = X 1000 Price Index (CPI)

Injections Withdrawals Money flows which increase Money flows which decrease the level of economic activity the flow of economic activity Expansion, Growth, Boom Contraction, Less Growth, Recession X M G S I T

  Good Points Negative Points   Simple easy measure Only includes activity   of economic activity which is paid for or earns and income. Comparable,  objective data that No volunteer work  can be compared In countries with high  between countries tax rates true level of economic activity is perhaps underestimated Does not consider the  wealth distribution

What two money flows are considered 1. withdrawals from the circular flow model 2. What are two flows are considered injections to the circular flow model? 3. What are two money flows related to the Government Sector? 4. What does GNP stand for 5. What do societies have to choose between investment and consumption? 6. What is the formula for calculating GDP using the expenditure approach? 7. What do the letters AD stand for? 8. If injections are greater than withdrawals does the economy grow or shrink? 9. Explain the affect interest rates has on household savings? 10. In which month is Mr Mc born?

http://welkerswikinomics.com/blog/2008  /04/18/from-the-help-desk-long-run-vs- short-run-economic-growth- consupmtion-and-investment/

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3.1 Intro To Macro And Measuring Gdp

by Andrew McCarthy

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