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Macroeconomics
2012
Prof Michael T. Noel
College of Business Administration Education
Topics:

 Definition of Macroeconomic
 Macroeconomic problem
 Circular flow of income and
  expenditure
What is macroeconomics?
Macroeconomics: analysis of the
 economy as a whole.
Factors affecting macroeconomics
 output (GDP or GNP)
 a.   consumption expenditure
 b.   Investment expenditure
 c.   Government expenditure
 d.   Balance of payment
The Economic Problem:

   How do we use scarce resources to
    best satisfy unlimited human wants?
Illustration of macroeconomic
problems


          Input:
 a.   Consumption
      expenditure
 b.   Investment       Output:
      expenditure     GDP/GNP
 c.   Government
      expenditure
 d.   Balance of
      payment
GROSS DOMESTIC
PRODUCT
 The market value of all goods and services
  produced within a country in a given period
  of time.
 It can be measured as all the
  EXPENDITURES to buy the goods and
  services produced.
 It can also be measured as all the INCOME
  earned from producing the goods and
  services.
 Since every peso spent is someone’s
  income, the two measures give the same
  result.
Flow of income and expenditure
is present in every economic
activities
A.   Consumption
B.   Production
C.   Taxation
D.   Transfer of payment
E.   Importation
F.   Exportation
Gross Domestic Product
The circular flow diagram shows the transactions among
households, firms, governments, and the rest of the world.
Gross Domestic Product
Firms hire factors of production from households. The blue
flow, Y, shows total income paid by firms to households.
Gross Domestic Product
◦Households buy consumer goods and services. The red
flow, C, shows consumption expenditures.
Gross Domestic Product
Households save, S, and pay taxes, T. Firms borrow some of
what households save to finance their investment.
Gross Domestic Product
◦Firms buy capital goods from other firms. The red flow I
represents this investment expenditure by firms.
Gross Domestic Product
◦Governments buy goods and services, G, and borrow or
repay debt if spending exceeds or is less than taxes
Gross Domestic Product
The rest of the world buys goods and services from us, X and
sells us goods and services, M—net exports are X - M
Gross Domestic Product
And the rest of the world borrows from us or lends to us
depending on whether net exports are positive or negative.
Gross Domestic Product
◦The blue and red flows are the circular flow of income and
expenditure. The green flows are borrowing, lending, and taxes.
Gross Domestic Product
The sum of the red flows equals the blue flow.
Gross Domestic Product
◦That is: Y = C + I + G + X - M
Expenditures
 Expenditures are purchases of goods and
  services.
 Expenditures are
    ◦ Consumption (C)
    ◦ Investment (I)
    ◦ Government spending (on goods and services)
      (G)
    ◦ Net Exports (X-M)
       Exports (X)
       Imports (M)
Expenditures equal Income
 Expenditures=   C+I+G+X–M

 All
   expenditures become
 someone’s income so

Y   (income) = C + I + G + X – M
Government
   Government spending:
    ◦ Goods and services (G)
         Roads, health care, education, helicopters, police officers
          salaries, judges salaries.
   Government revenue:
    ◦   Taxes
    ◦   (Income from Crown corporations)
    ◦   (Tariffs)
    ◦   Less Transfers to persons (part of net taxes)
         GST rebates, unemployment insurance, pensions,
           subsidies
         Interest on the debt (substantial)
         NOTE: The gov’t is not buying services, so transfers are
           not an expenditure.
Budgetary Deficits and
Surpluses
   Spending                  Surplus
    ◦ Goods and services        G + Tr < Tx
      (G) + Transfers to        G < Tx – Tr
      persons (Tr)              G < NT
   Revenue                   Deficit
    ◦ Taxes (Tx)                G + Tr > Tx
   Net Taxes                   G > Tx – Tr
    ◦ Tx – Tr = NT              G > NT
Savings and Investment
 Investment is financed by savings
 Savings have three sources:
    ◦ Savings by households
      The part of income households do not spend
       on consumption or net taxes.
      (S = Y - C - NT)
    ◦ Savings by governments
      NT – G = savings
    ◦ Savings of foreigners
      M – X = foreign borrowing
STOCKS AND FLOWS
   FLOWS                          STOCKS
    ◦ Income : the goods and        ◦ Wealth: All the goods a
      services produced each          person owns. Wealth is
      year                            the sum of past net
    ◦ Deficits: The excess of         saving.
      spending over income          ◦ Debt: the sum of all past
      each year                       deficits less all past
    ◦ Investment: Goods               surpluses
      produced to be used in        ◦ Capital: All the
      production each year            investment goods
    ◦ Surpluses: The excess           owned. Capital is the
      of revenue over                 sum of past net
      expenditures each year.         investment
Study well

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Circular flow of income and expenditure

  • 1. Macroeconomics 2012 Prof Michael T. Noel College of Business Administration Education
  • 2. Topics:  Definition of Macroeconomic  Macroeconomic problem  Circular flow of income and expenditure
  • 3. What is macroeconomics? Macroeconomics: analysis of the economy as a whole. Factors affecting macroeconomics output (GDP or GNP) a. consumption expenditure b. Investment expenditure c. Government expenditure d. Balance of payment
  • 4. The Economic Problem:  How do we use scarce resources to best satisfy unlimited human wants?
  • 5. Illustration of macroeconomic problems Input: a. Consumption expenditure b. Investment Output: expenditure GDP/GNP c. Government expenditure d. Balance of payment
  • 6. GROSS DOMESTIC PRODUCT  The market value of all goods and services produced within a country in a given period of time.  It can be measured as all the EXPENDITURES to buy the goods and services produced.  It can also be measured as all the INCOME earned from producing the goods and services.  Since every peso spent is someone’s income, the two measures give the same result.
  • 7. Flow of income and expenditure is present in every economic activities A. Consumption B. Production C. Taxation D. Transfer of payment E. Importation F. Exportation
  • 8. Gross Domestic Product The circular flow diagram shows the transactions among households, firms, governments, and the rest of the world.
  • 9. Gross Domestic Product Firms hire factors of production from households. The blue flow, Y, shows total income paid by firms to households.
  • 10. Gross Domestic Product ◦Households buy consumer goods and services. The red flow, C, shows consumption expenditures.
  • 11. Gross Domestic Product Households save, S, and pay taxes, T. Firms borrow some of what households save to finance their investment.
  • 12. Gross Domestic Product ◦Firms buy capital goods from other firms. The red flow I represents this investment expenditure by firms.
  • 13. Gross Domestic Product ◦Governments buy goods and services, G, and borrow or repay debt if spending exceeds or is less than taxes
  • 14. Gross Domestic Product The rest of the world buys goods and services from us, X and sells us goods and services, M—net exports are X - M
  • 15. Gross Domestic Product And the rest of the world borrows from us or lends to us depending on whether net exports are positive or negative.
  • 16. Gross Domestic Product ◦The blue and red flows are the circular flow of income and expenditure. The green flows are borrowing, lending, and taxes.
  • 17. Gross Domestic Product The sum of the red flows equals the blue flow.
  • 18. Gross Domestic Product ◦That is: Y = C + I + G + X - M
  • 19. Expenditures  Expenditures are purchases of goods and services.  Expenditures are ◦ Consumption (C) ◦ Investment (I) ◦ Government spending (on goods and services) (G) ◦ Net Exports (X-M)  Exports (X)  Imports (M)
  • 20. Expenditures equal Income  Expenditures= C+I+G+X–M  All expenditures become someone’s income so Y (income) = C + I + G + X – M
  • 21. Government  Government spending: ◦ Goods and services (G)  Roads, health care, education, helicopters, police officers salaries, judges salaries.  Government revenue: ◦ Taxes ◦ (Income from Crown corporations) ◦ (Tariffs) ◦ Less Transfers to persons (part of net taxes)  GST rebates, unemployment insurance, pensions, subsidies  Interest on the debt (substantial)  NOTE: The gov’t is not buying services, so transfers are not an expenditure.
  • 22. Budgetary Deficits and Surpluses  Spending  Surplus ◦ Goods and services  G + Tr < Tx (G) + Transfers to  G < Tx – Tr persons (Tr)  G < NT  Revenue  Deficit ◦ Taxes (Tx)  G + Tr > Tx  Net Taxes  G > Tx – Tr ◦ Tx – Tr = NT  G > NT
  • 23. Savings and Investment  Investment is financed by savings  Savings have three sources: ◦ Savings by households  The part of income households do not spend on consumption or net taxes.  (S = Y - C - NT) ◦ Savings by governments  NT – G = savings ◦ Savings of foreigners  M – X = foreign borrowing
  • 24. STOCKS AND FLOWS  FLOWS  STOCKS ◦ Income : the goods and ◦ Wealth: All the goods a services produced each person owns. Wealth is year the sum of past net ◦ Deficits: The excess of saving. spending over income ◦ Debt: the sum of all past each year deficits less all past ◦ Investment: Goods surpluses produced to be used in ◦ Capital: All the production each year investment goods ◦ Surpluses: The excess owned. Capital is the of revenue over sum of past net expenditures each year. investment