Busactivity

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  • Busactivity

    1. 1. 9The Economy andBusiness Activity
    2. 2. Macroeconomic Objectives• Microeconomics and macroeconomics• The major macroeconomic issues – economic growth – unemployment – inflation – balance of payments and exchange rates• Government macroeconomic policy – controlling various intermediate variables • interest rates, money supply, taxes, government expenditure, etc.
    3. 3. The Circular Flow of Income• The inner flow
    4. 4. The circular flow of income Firms Consumption of Factor domesticallypayments produced goods and services (Cd) Households
    5. 5. The Circular Flow of Income• Withdrawals – net saving (S) – net taxes (T) – import expenditure (M)• Injections – investment (I) – government expenditure (G) – export expenditure (X)
    6. 6. The circular flow of income INJECTIONS Export expenditure (X) Investment (I) Government Consumption of expenditure (G) Factor domestically BANKS, etc GOV. ABROADpayments produced goods and services (Cd) Import Net expenditure (M) Net taxes (T) saving (S) WITHDRAWALS
    7. 7. The Circular Flow of Income• The relationship between withdrawals and injections – the links between them – planned injections may not equal planned withdrawals • effect of J > W • effect of W > J – equilibrium in the circular flow
    8. 8. The circular flow of income INJECTIONS Export expenditure (X) Investment (I) Government Consumption of expenditure (G) Factor domestically BANKS, etc GOV. ABROADpayments produced goods and services (Cd) Import Net expenditure (M) Net taxes (T) saving (S) WITHDRAWALS
    9. 9. The Circular Flow of Income• The relationship between withdrawals and injections – the links between them – planned injections may not equal planned withdrawals • effect of J > W • effect of W > J – equilibrium in the circular flow• The circular flow and the four macroeconomic objectives
    10. 10. The Determination of Business Activity • The importance of aggregate demand – effects of J > W – effects of W > J • Identifying the equilibrium level of GDP – the 45o line diagram
    11. 11. Equilibrium GDPCd, E, W, J (£bn) GDP = Cd + W 45° O GDP (£bn)
    12. 12. The Determination of Business Activity • The importance of aggregate demand – effects of J > W – effects of W > J • Identifying the equilibrium level of GDP – the 45o line diagram – the GDP and E lines
    13. 13. Equilibrium GDPCd, E, W, J (£bn) GDP = Cd + W E = Cd + J Cd J 45° O GDP (£bn)
    14. 14. The Determination of Business Activity • The importance of aggregate demand – effects of J > W – effects of W > J • Identifying the equilibrium level of GDP – the 45o line diagram – the GDP and E lines • effects of E > GDP • effects of GDP > E
    15. 15. Equilibrium GDPCd, E, W, J (£bn) GDP = Cd + W c E = Cd + J d Cd a b 45° O GDP1 GDP2 GDP (£bn)
    16. 16. The Determination of Business Activity • The importance of aggregate demand – effects of J > W – effects of W > J • Identifying the equilibrium level of GDP – the 45o line diagram – the GDP and E lines • effects of GDP > E • effects of E > GDP – finding the equilibrium point
    17. 17. Equilibrium GDPCd, E, W, J (£bn) GDP = Cd + W c E = Cd + J d Cd e a b 45° O GDP1 GDPe GDP2 GDP (£bn)
    18. 18. The Determination of Business Activity • The multiplier – the multiplier process – definition of the multiplier ∀ ∆GDP / ∆J – the marginal propensity to consume domestic goods and services • mpcd = ∆Cd / ∆GDP
    19. 19. The multiplier: a rise in aggregate expenditureCd, E, W, J (£bn) GDP Multiplier = ∆GDP / ∆ J E2 = 60/20 = 3 E1 160∆GDP Cd 120∆J 100 ∆Cd = 40 O 100 160 GDP (£bn) ∆GDP = 60
    20. 20. The Determination of Business Activity • The multiplier – the multiplier process – definition of the multiplier ∀ ∆GDP / ∆J – the marginal propensity to consume domestic goods and services • mpcd = ∆Cd / ∆GDP – formula for the multiplier • 1 / (1–mpcd)
    21. 21. The multiplier: a rise in aggregate expenditureCd, E, W, J (£bn) GDP Multiplier = ∆GDP / ∆ E E2 = 60/20 = 3 E1 160∆GDP Cd 120∆J 100 ∆Cd = 40 O 100 160 GDP (£bn) ∆GDP = 60
    22. 22. The Business Cycle• Growth in actual and potential output• Economic growth & the business cycle – fluctuations in actual growth – the phases of the business cycle • the upturn • the expansion • the peaking out • the slowdown or recession
    23. 23. The business cycle Potential outputNational output 3 4 2 Actual 3 output 4 2 1 1 O Time
    24. 24. The Business Cycle• Growth in actual and potential output• Economic growth & the business cycle – fluctuations in actual growth – the phases of the business cycle • the upturn • the expansion • the peaking out • the slowdown or recession – long-term output trend
    25. 25. The business cycle Potential output TrendNational output output Actual output O Time
    26. 26. The Business Cycle• Growth in actual and potential output• Economic growth & the business cycle – fluctuations in actual growth – the phases of the business cycle • the upturn • the expansion • the peaking out • the slowdown or recession – long-term output trend – the business cycle in practice
    27. 27. The Business Cycle• Growth in actual and potential output• Economic growth & the business cycle – fluctuations in actual growth – the phases of the business cycle • the upturn • the expansion • the peaking out • the slowdown or recession – long-term output trend – the business cycle in practice • the length of the phases
    28. 28. The Business Cycle• Growth in actual and potential output• Economic growth & the business cycle – fluctuations in actual growth – the phases of the business cycle • the upturn • the expansion • the peaking out • the slowdown or recession – long-term output trend – the business cycle in practice • the length of the phases • the magnitude of the phases
    29. 29. Growth rates in selected industrial countries 10 9 UK 8Annual growth rate (%) 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000 2005
    30. 30. Growth rates in selected industrial countries 10 9 UK 8Annual growth rate (%) 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000 2005
    31. 31. Growth rates in selected industrial countries 10 9 UK 8 EU15Annual growth rate (%) 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000 2005
    32. 32. Growth rates in selected industrial countries 10 9 UK 8 EU15Annual growth rate (%) 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000 2005
    33. 33. Growth rates in selected industrial countries 10 9 UK USA 8 EU15Annual growth rate (%) 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000 2005
    34. 34. Growth rates in selected industrial countries 10 9 UK USA 8 EU15Annual growth rate (%) 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000 2005
    35. 35. Growth rates in selected industrial countries 10 9 UK USA 8 EU15 JapanAnnual growth rate (%) 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000 2005
    36. 36. Growth rates in selected industrial countries 10 9 UK USA 8 EU15 JapanAnnual growth rate (%) 7 6 5 4 3 2 1 0 -1 -2 -3 1970 1975 1980 1985 1990 1995 2000 2005
    37. 37. The Business Cycle• Causes of cyclical fluctuations – Why does AD change in the first place? – Why do booms and recessions persist? • time lags • bandwagon effects – the accelerator – Why do booms and recessions end? • ceilings and floors • echo effects • the accelerator • random shocks • changes in government policy
    38. 38. Money, Interest Rates and Business Activity • The meaning of money – narrow definitions of money (M0 in the UK) – broad definitions of money (M4 in the UK) • The supply of money – banks and the creation of credit • simple illustration
    39. 39. Credit creation: Banks original balance sheet
    40. 40. Credit creation: Effect of a new deposit of £10bn
    41. 41. Credit creation: Full effect of a new deposit of £10bn
    42. 42. Money, Interest Rates and Business Activity • The meaning of money – narrow definitions of money (M0 in the UK) – broad definitions of money (M4 in the UK) • The supply of money – banks and the creation of credit • simple illustration • the deposits multiplier
    43. 43. Money, Interest Rates and Business Activity • The meaning of money – narrow definitions of money (M0 in the UK) – broad definitions of money (M4 in the UK) • The supply of money – banks and the creation of credit • simple illustration • the deposits multiplier – creation of credit: the real world
    44. 44. Money, Interest Rates and Business Activity • The meaning of money – narrow definitions of money (M0 in the UK) – broad definitions of money (M4 in the UK) • The supply of money – banks and the creation of credit • simple illustration • the deposits multiplier – creation of credit: the real world • banks liquidity ratio may vary
    45. 45. Money, Interest Rates and Business Activity • The meaning of money – narrow definitions of money (M0 in the UK) – broad definitions of money (M4 in the UK) • The supply of money – banks and the creation of credit • simple illustration • the deposits multiplier – creation of credit: the real world • banks liquidity ratio may vary • banks respond to the demand for money
    46. 46. Money, Interest Rates and Business Activity • Causes of increases in money supply – increased demand for money • banks reduce liquidity ratio – inflow of funds from abroad – a public-sector deficit (PSNCR) • depends on how it is financed – from banking sector: money supply expands – from outside the banking sector: money supply does not expand
    47. 47. Money, Interest Rates and Business Activity • The demand for money – reasons for holding money • transactions and precautionary motive • assets or speculative motive – determinants of demand for money • money national income • speculation about future return on assets • rate of interest
    48. 48. Money, Interest Rates and Business Activity • Equilibrium rate of interest – where demand for money equals supply
    49. 49. Equilibrium in the money market MSRate of interest re Md O Money
    50. 50. Money, Interest Rates and Business Activity • Equilibrium rate of interest – where demand for money equals supply – if supply of money rises or demand for money falls, the rate of interest will fall
    51. 51. Equilibrium in the money market MSRate of interest re Md O Money
    52. 52. Money, Interest Rates and Business Activity • Effects of changes in money supply on national income – rise in money supply causes interest rate to fall – fall in interest rate causes investment to rise – rise in investment causes GDP to rise • Determinants of the size of these effects
    53. 53. Unemployment• Measuring unemployment – defining the unemployment rate – claimant unemployment • do claimant statistics give a true picture of unemployment? – standardised unemployment (ILO/OECD) • use of labour force surveys
    54. 54. Unemployment• Unemployment and the labour market – the aggregate demand and supply of labour
    55. 55. Aggregate demand and supply of labour ASLAverage (real) wage rate ADL O No. of workers
    56. 56. Unemployment• Unemployment and the labour market – the aggregate demand and supply of labour • equilibrium in the model
    57. 57. Aggregate demand and supply of labour ASLAverage (real) wage rate We ADL O Qe No. of workers
    58. 58. Unemployment• Unemployment and the labour market – the aggregate demand and supply of labour • equilibrium in the model – disequilibrium unemployment
    59. 59. Disequilibrium unemployment ASLAverage (real) wage rate B A W2 We ADL O Q2 Q1 No. of workers
    60. 60. Unemployment• Unemployment and the labour market – the aggregate demand and supply of labour • equilibrium in the model – disequilibrium unemployment – equilibrium unemployment
    61. 61. Equilibrium unemployment ASLAverage (real) wage rate e We ADL O Qe No. of workers
    62. 62. Equilibrium unemployment ASL NAverage (real) wage rate e d We ADL O Qe Q2 No. of workers
    63. 63. Equilibrium and disequilibrium unemployment ASLAverage (real) wage rate e We ADL O Qe No. of workers
    64. 64. Equilibrium and disequilibrium unemployment ASLAverage (real) wage rate Disequilibrium unemployment b a W2 e We ADL O No. of workers
    65. 65. Equilibrium and disequilibrium unemployment ASL NAverage (real) wage rate Disequilibrium unemployment b a c W2 e We Equilibrium unemployment ADL O No. of workers
    66. 66. Unemployment• Unemployment and the labour market – the aggregate demand and supply of labour • equilibrium in the model – disequilibrium unemployment – equilibrium unemployment• Disequilibrium unemployment
    67. 67. Unemployment• Unemployment and the labour market – the aggregate demand and supply of labour • equilibrium in the model – disequilibrium unemployment – equilibrium unemployment• Disequilibrium unemployment – real-wage unemployment
    68. 68. Unemployment• Unemployment and the labour market – the aggregate demand and supply of labour • equilibrium in the model – disequilibrium unemployment – equilibrium unemployment• Disequilibrium unemployment – real-wage unemployment – demand-deficient (cyclical) unemployment
    69. 69. Unemployment rates in selected industrial countries 14 UKAnnual growth rate (%) 12 10 8 6 4 2 0 1970 1975 1980 1985 1990 1995 2000 2005
    70. 70. Unemployment rates in selected industrial countries 14 UKAnnual growth rate (%) 12 10 8 6 4 2 0 1970 1975 1980 1985 1990 1995 2000 2005
    71. 71. Unemployment rates in selected industrial countries 14 UK EU15Annual growth rate (%) 12 10 8 6 4 2 0 1970 1975 1980 1985 1990 1995 2000 2005
    72. 72. Unemployment rates in selected industrial countries 14 UK EU15Annual growth rate (%) 12 10 8 6 4 2 0 1970 1975 1980 1985 1990 1995 2000 2005
    73. 73. Unemployment rates in selected industrial countries 14 UK USA EU15Annual growth rate (%) 12 10 8 6 4 2 0 1970 1975 1980 1985 1990 1995 2000 2005
    74. 74. Unemployment rates in selected industrial countries 14 UK USA EU15Annual growth rate (%) 12 10 8 6 4 2 0 1970 1975 1980 1985 1990 1995 2000 2005
    75. 75. Unemployment rates in selected industrial countries 14 UK USA EU15 JapanAnnual growth rate (%) 12 10 8 6 4 2 0 1970 1975 1980 1985 1990 1995 2000 2005
    76. 76. Unemployment rates in selected industrial countries 14 UK USA EU15 JapanAnnual growth rate (%) 12 10 8 6 4 2 0 1970 1975 1980 1985 1990 1995 2000 2005
    77. 77. Unemployment• Equilibrium unemployment – frictional (search) unemployment – structural unemployment • changing pattern of demand • technological unemployment • regional unemployment – seasonal unemployment
    78. 78. Inflation• Defining inflation – consumer price inflation – other categories of inflation• Inflation in historical perspective – low inflation in 1950s and 60s – high inflation in 1970s and 80s – low inflation since mid 1990s • most developed countries gear monetary policy to achieving a low target rate of inflation
    79. 79. Inflation rates in selected industrial countries 26 24 UK 22Annual growth rate (%) 20 18 16 14 12 10 8 6 4 2 0 -2 1965 1970 1975 1980 1985 1990 1995 2000 2005
    80. 80. Inflation rates in selected industrial countries 26 24 UK 22Annual growth rate (%) 20 18 16 14 12 10 8 6 4 2 0 -2 1965 1970 1975 1980 1985 1990 1995 2000 2005
    81. 81. Inflation rates in selected industrial countries 26 24 UK 22 EU15Annual growth rate (%) 20 18 16 14 12 10 8 6 4 2 0 -2 1965 1970 1975 1980 1985 1990 1995 2000 2005
    82. 82. Inflation rates in selected industrial countries 26 24 UK 22 EU15Annual growth rate (%) 20 18 16 14 12 10 8 6 4 2 0 -2 1965 1970 1975 1980 1985 1990 1995 2000 2005
    83. 83. Inflation rates in selected industrial countries 26 24 UK USA 22 EU15Annual growth rate (%) 20 18 16 14 12 10 8 6 4 2 0 -2 1965 1970 1975 1980 1985 1990 1995 2000 2005
    84. 84. Inflation rates in selected industrial countries 26 24 UK USA 22 EU15Annual growth rate (%) 20 18 16 14 12 10 8 6 4 2 0 -2 1965 1970 1975 1980 1985 1990 1995 2000 2005
    85. 85. Inflation rates in selected industrial countries 26 24 UK USA 22 EU15 JapanAnnual growth rate (%) 20 18 16 14 12 10 8 6 4 2 0 -2 1965 1970 1975 1980 1985 1990 1995 2000 2005
    86. 86. Inflation rates in selected industrial countries 26 24 UK USA 22 EU15 JapanAnnual growth rate (%) 20 18 16 14 12 10 8 6 4 2 0 -2 1965 1970 1975 1980 1985 1990 1995 2000 2005
    87. 87. Inflation• Aggregate demand & supply and prices – aggregate demand curve
    88. 88. Price level Aggregate demand and aggregate supply AD O National output
    89. 89. Inflation• Aggregate demand & supply and prices – aggregate demand curve • why AD curves slope downwards
    90. 90. Inflation• Aggregate demand & supply and prices – aggregate demand curve • why AD curves slope downwards – lower price level leads to fewer imports – lower price level tends to cause interest rates to fall – lower price level increases value of peoples savings
    91. 91. Inflation• Aggregate demand & supply and prices – aggregate demand curve • why AD curves slope downwards – lower price level leads to fewer imports – lower price level tends to cause interest rates to fall – lower price level increases value of peoples savings – aggregate supply curve
    92. 92. Aggregate demand and aggregate supply ASPrice level AD O National output
    93. 93. Inflation• Aggregate demand & supply and prices – aggregate demand curve • why AD curves slope downwards – lower price level leads to fewer imports – lower price level tends to cause interest rates to fall – lower price level increases value of peoples savings – aggregate supply curve • why AS curves generally slope upwards
    94. 94. Inflation• Aggregate demand & supply and prices – aggregate demand curve • why AD curves slope downwards – lower price level leads to fewer imports – lower price level tends to cause interest rates to fall – lower price level increases value of peoples savings – aggregate supply curve • why AS curves generally slope upwards – equilibrium
    95. 95. Aggregate demand and aggregate supply ASPrice level Pe AD O National output
    96. 96. Aggregate demand and aggregate supply ASPrice level Pe b a P2 AD O National output
    97. 97. Inflation• Aggregate demand & supply and prices – aggregate demand curve • why AD curves slope downwards – lower price level leads to fewer imports – lower price level tends to cause interest rates to fall – lower price level increases value of peoples savings – aggregate supply curve • why AS curves generally slope upwards – equilibrium – shifts in AD and AS curves
    98. 98. Inflation• Causes of inflation – demand pull
    99. 99. Demand-pull inflation ASPrice level P1 AD1 O Q1 National output
    100. 100. Demand-pull inflation ASPrice level P1 AD2 AD1 O Q1 National output
    101. 101. Demand-pull inflation ASPrice level P2 P1 AD2 AD1 O Q1 Q2 National output
    102. 102. Inflation• Causes of inflation – demand pull – cost push • wage push • profit push • import-price push
    103. 103. Cost-push inflation AS1Price level P1 AD O Q1 National output
    104. 104. Cost-push inflation AS2 AS1Price level P1 AD O Q1 National output
    105. 105. Cost-push inflation AS2 AS1Price level P2 P1 AD O Q2 Q1 National output
    106. 106. Inflation• Causes of inflation – demand pull – cost push • wage push • profit push • import-price push – the interaction of demand-pull and cost- push inflation
    107. 107. The interaction of demand-pull and cost-push inflation AS1Price level P1 AD1 O National output
    108. 108. The interaction of demand-pull and cost-push inflation AS2 AS1Price level P2 P1 AD2 AD1 O National output
    109. 109. The interaction of demand-pull and cost-push inflation AS3 AS 2 AS1 P3Price level P2 P1 AD3 AD2 AD1 O National output
    110. 110. Inflation• Causes of inflation – demand pull – cost push • wage push • profit push • import-price push – expectations and inflation
    111. 111. Inflation• Causes of inflation – demand pull – cost push • wage push • profit push • import-price push – expectations and inflation• Policies to tackle inflation
    112. 112. Inflation• Causes of inflation – demand pull – cost push • wage push • profit push • import-price push – expectations and inflation• Policies to tackle inflation – demand-side policies
    113. 113. Inflation• Causes of inflation – demand pull – cost push • wage push • profit push • import-price push – expectations and inflation• Policies to tackle inflation – demand-side policies – supply-side policies

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