Measuring macroeconomic activity is not very interesting to most students. However, it is essential that they learn the material in this chapter. Use fear as a motivation: if they don’t learn what’s in this chapter, they will never be able to understand future chapters and will be doomed in the course. (O.K., so it’s an exaggeration, it’s for a good cause.)
Time permitting, you may want to note that GDP statistics are compiled on a quarterly basis, but reported at annual rates -- what GDP would be if production continued for an entire year at the same rate output was produced during the quarter.
Instructor Notes: 1) In the circular flow of income and expenditure, households receive incomes (Y) from firms (blue flow) and make consumption expenditures (C); firms make investment expenditures (I); governments purchase goods and services (G); the rest of the world purchases net exports (NX)--(red flows). 2) Aggregate income (blue flow) equals aggregate expenditure (red flows). 3) Households’ saving (S) and net taxes (T) leak from the circular flow. 4) Firms borrow to finance their investment expenditures, and governments and the rest of the world borrow to finance their deficits or lend their surpluses (green flows). 6) Net exports (NX) is exports (X) minus imports (M).
These are the three aggregate markets macroeconomics deals with. You may want to contrast this with microeconomic markets.
Table 6.1 (23.1)
Measuring GDP What is the circular flow of income and expenditure? How are GDP, real GDP, and the average price level measured?
Your Weekend Parkin Chapter 6 and 7 Lecture Slides, Homework when there is nothing else to do!!!!!!!
Economic Barometers The Pakistani Bureau of Statistics publishes GDP every quarter (three months). These statistics are a barometer of the economy, telling us: how fast it has grown the rate of inflation Companies use this data to forecast future demand for their products.
Gross Domestic Product Gross domestic product (GDP) is the dollar value of total production of goods and services in a country during a calendar year. the easiest way to understand GDP is to use a circular flow diagram.
Sectors of the Economy The economy has four sectors: households firms governments the rest of the world
Markets of the Economy The economy has three aggregate markets: Resource or factor markets goods and services markets (heart) financial markets
Gross Domestic Product Gross domestic product is the value of aggregate production in a country during a year. GDP can be valued one of two ways: By what buyers pay for it By the Aggregate Income of Factor of Production. These two ways of adding up GDP always give the same answer.
Aggregate Expenditure The total amount that buyers pay for the goods produced is aggregate expenditure. Aggregate expenditure includes: Consumption (C) Investment (I) Government purchases (G) Net exports (NX)
Gross Domestic Product Expenditure Equals Income Y = C + I + G + NX Expenditure Approach Uses data on consumption expenditure, investment, government purchases, and net exports
Gross Domestic Product Expenditure Approach Personal consumption expenditures are the expenditures by households on goods and services produced in Pakistan and the rest of the world Consumption Function : C = a ( Y – T) a = Marginal Propensity to consume
Gross Domestic Product Expenditure Approach Gross domestic investment is expenditure on capital equipment and buildings by firms. Also, it includes the change in inventories. Investment Function : I = I ( assumed exogenous) - Investment is inversely related to interest rate.
Gross Domestic Product Expenditure Approach Government purchases of goods and services are the purchases of goods and services by all levels of government. • Does not include transfer payments Government Exp. Function : G = G (exogenous)
Gross Domestic Product Expenditure Approach Net exports of goods and services are the value of exports minus the value of imports. Net Export Function : Nx = Ex - Im
GDP in 1997 Item Amount % of (billion $) GDPConsumption (C) 5,628 68.7Investment (I) 1,133 15.3Government (G) 1,275 17.4Net exports (NX) -98 -1.4GDP (Y) 7,938 100.0
•Using the circular flow Diagram below answer the following questions:
The figure above shows the flows of expenditure and income for a typical economy. During the current fiscal year, Awas 20 million, B was 60 million, C was 24 million, D was 30 million and E was 6 million. Calculate:•Aggregate Expenditure•Aggregate Income•GDP•Government budget Deficit•Government Saving•National Saving•Borrowing from the rest of the world.Y = C+I+G+(X-M)Y-C-T=S (Private Savings = Income – consumption – taxes)T-G = S (Public Savings = Taxes – Government exp.)
•What is nominal and real GDP. Calculate Real and NominalG.D.P. Products Quantity Prices Year Balls 100 1 2008 Bats 20 5 Balls 50 2 2009 Bats 30 6
Elements of the Keynesian Cross consumption function: C = a(Y-T) govt policy variables: G=G , T=Tfor now, plannedinvestment is exogenous: I=I planned expenditure: E = a(Y-T) + I + G equilibrium condition: actual expenditure = planned expenditure Y=E
SAMPLE QUESTIONGeneral equilibrium: Solution procedureStart with the equation in general form:Y = a ( Y - T) + Ip + G + NXGiven that Marginal Propensity to consume = 0.8 , Taxes = 1000 ,Investment = 1500, Govt. Exp. = 1200 & Net Exports = 500Calculate Aggregate Income.
SAMPLE QUESTIONKeynesian equilbrium: Solution procedureStart with the equation in general form:Y = a ( Y - T) + Ip + G + NXSubstitute in the given numbers:Y = 0.8 ( Y - 1000) + 1500 + 1200 + 500Collect all the constant terms:Y = 3200 + 0.8Y - 800Y = 2400 + 0.8YSubtract 0.8 Y from both sides of the equation:0.2 Y = 2400Finally, multiply both sides by 1 / 0.2 = 5Y = 5 (2400) = 12,000