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Macro Economics: M. A. Baqui Khalily Spring 2019

The document discusses macroeconomics topics including distinguishing microeconomics from macroeconomics, goals of macroeconomics such as low unemployment and high growth, the five sectors of the economy, and key macroeconomic concepts like GDP, consumption, investment, and government spending.

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Sakib Ahmed Sharil
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28 views28 pages

Macro Economics: M. A. Baqui Khalily Spring 2019

The document discusses macroeconomics topics including distinguishing microeconomics from macroeconomics, goals of macroeconomics such as low unemployment and high growth, the five sectors of the economy, and key macroeconomic concepts like GDP, consumption, investment, and government spending.

Uploaded by

Sakib Ahmed Sharil
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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MACRO ECONOMICS

M. A. BAQUI KHALILY
Spring 2019
BASIC ISSUES
• Distinguish between Micro-economics and Macro-
economics
– Microeconomics deals with individual and industry level
analysis of economics behavior and resource allocation;
– Macroeconomics are concerned with the economic behaviour
at the aggregate level; relationship between output, price level,
inflation and growth is explained by aggregate demand and
aggregate supply.
• Three issues:
(1) How do we explain high and persistent unemployment?
(2) How do we explain inflation?
(3) What determines economic growth?
Goals of Macro Economy
• Complementary Goals
– Low unemployment and high economic growth

• Conflicting Goals
– Low unemployment and low inflation
(Will be better understood when you will understand the
relationship between consumption and investment)
FOCUS IN MACROECONOMICS
• Describes the economy on the highest level of aggregation

• Therefore focuses on:

– GDP (GNP), Consumption,


– Savings, Investment,
– Money, Inflation,
– Unemployment, Public finance deficit,
– Current account deficit, Public debt,
– Exchange rate, Interest rate and others

• Analysis is based on aggregation in five sectors.


FIVE SECTORS
• Households:
– all population, own and provide factors of production
(labour, land, capital) to the firms,
– receive payments (income) from them and
– generate expenditures for goods and services (for final
consumption)

• Firms:
– “own” technology,
– employ factors,
– produce goods and services for
• final consumption (households, government, export)
or
• intermediate use (other firms, incl. foreign)
FIVE SECTORS (Cont.)
• Government (state):

– Collects taxes
– Manages activities that society expects from it:
• spends on goods and services for public purpose (e.g. defence), on
employees in state administration, even owns some firms (that
produce goods and services) – “produces” public services
• finances transfers and social benefits

• Financial sector:
– provides transmission services that channel money from savers to
borrowers (incl. government)

• Foreign sector:
– purchases goods and services (exports),
– sells goods and services (imports),
– generates flows of capital out and into the domestic country (FDI in or
out, debt financing, equity capital)
General Role of the State
• State executes different policies/interventions that affect general
welfare of the society

• Different groups (with different vested interests) may have different


thoughts about the role of state here, examples:

– Efficient allocation of the resources ⇒ cultivating the markets,


regulatory and competition policies

– Provision of essential services (e.g. basic education, defence)


– Attempting to achieve a fair distribution of wealth across the
society ⇒ welfare policies

– Ensuring society’s needs (police, defence, legal system, coping


with the externalities, etc.) ⇒ general role of state, not a policy
General Role of the State

– Transfer payments, providing minimal living standards (social


policies, e.g. unemployment benefits)

– Long-term social policies, e.g. securing the stable health care


and pension systems

– Regulation of natural monopolies

– External social costs (e.g. drugs) and benefits (e.g. free


vaccination) of the society

– Support to industry and commerce


Macroeconomic policies
• Fundamental measure of the economy: income(output),
expressed as gross domestic product (GDP)

• GDP development over time: GDP growth:


– Over long period: long term growth
• In search policies the determine the long-term
differences in economic level among the countries
– Over shorter period: business cycle
• In search policies that help to overcome the
fluctuations of GDP
Macroeconomic Policies
• Other basic economic variables, closely interlinked
with/influencing both short- and long-term GDP growth

– (un)employment
– inflation
– Interest and exchange rate
– Components of aggregate demand: household
consumption, private investment, expenditure of the state,
exports, imports
– Factors, determining the aggregate supply: amount of
capital and labor available, general productivity of country’s
economy
– Public finance deficit
– Debt of public and private sector (and sum of both)
– Current account deficit and balance of payments
Macroeconomic Policies
• When translated into policies, this entails
– Fiscal policy
– Monetary policy
– Exchange rate policy
– International trade policy

• However, there are many other policies, more like


intervention-policies:
– Supply-side policy
– Price and income policies
– Employment policy
– … and maybe some other policies (according the ideology,
political inclination and maybe populism of policy-makers)
BASIC CONCEPTS
• Gross Domestic Product:
– Value of all goods and services produced during a period.
– Basic measure of economic activity.
• Need to differentiate:
– Nominal versus real GDP: Nominal GDP at current price, and
real GDP is at constant price adjusted for inflation). Ratio of
nominal GDP and real GDP is GDP deflator.
– Levels of GDP versus growth GDP
• GDP (absolute) versus Per-capita GDP (GDP divided by
population)
• Employment and Unemployment rate (percentage of
labor force remaining unemployed)
Basic Concepts
• Macroeconomic performance is judged by
– Inflation rate (Change in cost of living)
– Growth rate of output
– Rate of unemployment
• Business Cycle
– Movement of economic activity (e.g., GDP) around the path of trend growth.
There will be peak and down.
– GDP does not grow along the trend line.
• Aggregate Demand:
– Relationship between spending on goods and services and the level of
prices.
• Aggregate Supply:
– Relationship between amount of goods and services that firms produce and
price level
• The basic tools for analyzing output, price level, inflation, and
growth are aggregate demand and aggregate supply.
Needs to Remember Always
• Net National Product (NNP)
= GDP plus net factor payment from abroad less
depreciation
• National Income (NI):
– NNP less indirect tax (e.g., VAT) and other taxes (duty)
• Personal Income (PI):
- NI less corporate profit plus government
transfer, interest adjustment and dividend
• Disposable Personal Income (DPI):
– PI less personal tax and non-tax payment
Gross Domestic Product
Two definitions:
1. Total expenditure on domestically-produced final
goods and services
2. Total income earned by domestically-located factors
of production
Why expenditure = income

In every transaction,
the buyer’s expenditure becomes the seller’s income.
Thus, the sum of all expenditure equals
the sum of all income.
Circular Flow
Income($)

Labor

Households Firms

Goods(bread)

Expenditure($)
Consumption
• The value of all goods and services bought by
households. Includes:
• Durable goods last a long time
ex: cars, home appliances
• Non-durable goods last a short time
ex: food, clothing
• Services work done for consumers
ex: dry cleaning,
air travel.
Investment
Spending on [the factor of production] capital.
Spending on goods bought for future use.
Includes:
 Business fixed investment
spending on plant and equipment that firms will use
to produce other goods & services
 Residential fixed investment
spending on housing units by consumers and
landlords
 Inventory investment
the change in the value of all firms’ inventories
Investment VS. Capital

• Capital is one of the factors of production.


At any given moment, the economy has a
certain overall stock of capital.
• Investment is spending on new capital.
Example (assumes no depreciation):
 1/7/2012:
economy has BDT 500b worth of capital
 during 2012-13:
investment = BDT 37b
 1/7/2013:
economy will have $537b worth of capital
Net exports
Net Exports:
(NX = EX - IM)
Where,
EX: Value of total exports
IM: Value of total imports
Government spending (G)

• G includes all government spending on goods and


services.
• G excludes transfer payments
(e.g. unemployment insurance payments), because
they do not represent spending on goods and
services.
An important identity

Y = C + I + G + NX
where
Y = GDP = the value of total output
C + I + G + NX = aggregate
expenditure
Let Us Understand …
Suppose a firm
• produces BDT 10 million worth of final
goods
• but only sells BDT 9 million worth.

Does this violate the


expenditure = output identity?
Why output = expenditure
• Unsold output goes into inventory,
and is counted as “inventory investment”…
…whether the inventory buildup was intentional
or not.

• In effect, we are assuming that


firms purchase their unsold output.
Gross Domestic Product (GDP)

We have now seen that GDP measures


 total income
 total output
 total expenditure
 the sum of value-added at all stages
in the production of final goods
GNP vs. GDP
• Gross National Product (GNP):
Total income earned by the nation’s factors of
production, regardless of where located
• Gross Domestic Product (GDP):
Total income earned by domestically-located
factors of production, regardless of nationality.
(GNP – GDP) = (factor payments from abroad)

– (factor payments to abroad)

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