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Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra,

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Presentation on theme: "Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra,"— Presentation transcript:

1 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-1 The macroeconomic environment 2012

2 INTRODUCTION In this class we are going to briefly explore a range of important macroeconomic concepts. Macroeconomics is the study of the entire economy and not just a single market. Macroeconomic problems often require political solutions at a national level. Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-2

3 Macro is the study of the external environment of the firm, opportunities and threats? These days the external environment of firms is variable, dark, gloomy and seen a threat. But if managers understand how the macro economy works then they may be able to turn threats in opportunities. Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-3

4 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-4 Gross Domestic Product GDP is the total market value of all final goods and services produced in the economy during a specific period Measured in money terms and not in physical units Usually measured over a year

5 Is Zimbabwe the fastest growing economy in the world? Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-5

6 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-6 What is included in GDP? Only final goods and services Intermediate goods are excluded to avoid double counting To avoid double counting calculate value added – the market value of a firms output less the value of intermediate component

7 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-7 What is included in GDP? (cont.) GDP excludes non-productive transactions Two major types of non-productive transactions: – purely financial transactions, the commission may be included in GDP but the value of the shares traded – sales of second-hand goods, the cost of preparing a used car for sale may be included in GDP but not the acquisition cost of the car.

8 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-8 Two Approaches to Measuring GDP Expenditure approach (GDPE) – Measures GDP as the sum of all the expenditures involved in taking that total output off the market Income approach (GDPI) – Sum of the incomes derived from the production of the GDP What really happens (GDPA) – Both approaches have errors and omissions, there is still a sizeable black economy is Australia, so the ABS calculates an average

9 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-9 Expenditure Approach GDP is derived as a sum of (The Aggregate Expenditures model), this is the Keynesian Model. Consumption expenditures by households (C) Investment expenditures by business (I) Government purchases of goods and services (G) Net export expenditures (NX) GDP = C + I + G + NX or GDP = C + I + G + (X – M)

10 The Two-sector Model of the Economy Drawn on the assumption that; Firms do all the producing, but own not factors of production Households do all the consumption and own all the factors of production, Neither households nor firms save So by definition production = consumption 4-10

11 11 Productive resources Income Expenditure Goods and Services Household sector Product market Firms sector Factor market The Two-sector Model of the Economy

12 But in reality – Households save (maybe not mine) – Firms save, they build up inventories – There is financial sector – There is a government – Countries trade with each other So, we have a four sector model of the economy This is a simple model but very powerful 4-12

13 13 Household sector Financial sector Government sector External sector Firms sector Imports Savings Government expenditure Exports Taxation Investment INJECTIONSINJECTIONSINJECTIONSINJECTIONS LEAKAGESLEAKAGESLEAKAGESLEAKAGES Expenditure Income The Four Sector Model of the Economy

14 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-14 Money GDP vs Real GDP Money GDP is GDP measured in current prices (nominal GDP) Real GDP is money GDP adjusted for inflation by an implicit price deflator, also called constant price GDP Nominal GDP needs to be deflated using a price index to take into account inflationary effects. Target: RGDP growth of 3 – 4% pa to allow for 2% pa real per capital growth

15 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-15 Inflating and Deflating Consumer Price Index – measures the price level of a market basket of goods and services for a typical family. – In Australia the basket contains 107 different goods and 30,000 prices are sampled each month. – This is the most commonly used price deflator, but others are available. Target: with the advent of monetarism and strong independent central banks target is 2 to 3 %

16 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-16 Real and Nominal GDP Real GDP = Money GDP Price Index (as a decimal) We can find the price index value on the ABS website

17 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 5-17 The Business Cycle The recurrent, somewhat cyclical, increases and decreases in the level or rate of growth in economic activity that typify the pattern of progress of our economys real GDP over time

18 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 5-18 Phases of the Business Cycle Peak – temporary maximum economic activity often associated with demand pull and maybe cost push inflation Slow down or contraction – decline in output and employment to lower than planned levels – A recession two or more quarters of negative growth – A depression is a severe and prolonged recession, no accepted definition

19 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 5-19 Phases of the Business Cycle (cont.) Trough – output and employment bottom out at their lowest levels, inflation is no longer a problem but unemployment may be a problem Recovery or Expansion – output and employment expand towards the full-employment level or capacity level

20 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 5-20 Phases of the Business Cycle RECOVERY Level of business activity Time TROUGH SLOWDOWN PEAK GROWTH TREND Long-run trend is only about 2% pa, but over 300 years this has led to huge increases in living standards,

21 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 5-21 Types of Unemployment Frictional – workers between jobs, temporarily laid off due to seasonality, and new entrants – allows movement of labour from low to high productivity – inevitable and partly desirable, facilities allocative efficiency Structural – mismatch in skills and geographic location – not employable without additional training, education and geographical movement

22 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 5-22 Types of Unemployment Cyclical – unemployment caused by the business cycle, or due to insufficient aggregate demand or total spending Seasonal – Historically in Australia related to agricultural production, but now more closely related to fluctuations in labour demand in tourism and hospitality Target: government has adopted full employment as a goal, but no target, it constantly changes by now seems to 4-5%

23 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 5-23 Inflation Inflation is a continuous rise in the general price level The inflation rate is measured as follows: Inflationrate Current year index – Previous year index Previous year index × 100 =

24 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 5-24 Theories of Inflation Two general theories of inflation: Demand-Pull Inflation – caused by excess demand for output Cost-Push Inflation – rise in prices arising from increased cost of production due to: wage push profit push Target: Govt adopted stable prices as a goal, RBA sets target of 2 to 3 per cent

25 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Demand-Pull Inflation Occurs when an increase in AD pulls up the price level Graphically: AD shifts rightward along a stable AS curve Short-run: increased prices and real output

26 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Demand pull inflation 0 P0P0 Q0Q0 AD 0 AS Price Level Real GDP AS LR P1P1 Q1Q1 AD 1 P2P2 Q2Q2 AD 3

27 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Cost-Push Inflation Occurs when an increase in the cost of production at each price level shifts the AS curve leftward, resulting in increased prices Short run: increased prices and decreased real output (and more unemployment)

28 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Cost push inflation 0 P1P1 AS 1 AD 1 AS 2 P2P2 P3P3 AS LR QFQF Price Level Real GDP AS 3 Q2Q2 Q3Q3 Q1Q1

29 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia Demand-Pull Inflation In the short run demand-pull inflation will drive up the price level and increase output In the long run, the increase in aggregate demand has only moved the economy along the vertical aggregate supply curve AS LR

30 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia AS 2 Demand-Pull Cost-Push Inflation AD 2 0 AS 1 AS LR AD 1 Q1Q1 Price Level Real GDP P1P1 e1e1e1e1 P2P2 Q2Q2 e2e2e2e2 P3P3 e3e3e3e3

31 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-31


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