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Aggregate Demand and Supply and Macroeconomic Problems.

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Presentation on theme: "Aggregate Demand and Supply and Macroeconomic Problems."— Presentation transcript:

1 Aggregate Demand and Supply and Macroeconomic Problems

2 Macroeconomic Objectives n Distinction between microeconomics and macroeconomics n The major macroeconomic issues < economic growth < unemployment < inflation < balance of payments and exchange rates F balance of payments deficits and surpluses F exchange rate movements n Distinction between microeconomics and macroeconomics n The major macroeconomic issues < economic growth < unemployment < inflation < balance of payments and exchange rates F balance of payments deficits and surpluses F exchange rate movements

3 Economic growth (average % per annum), Unemployment (average %), Inflation (average % per annum)

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6 The Circular Flow of Income n The inner flow

7 Factor payments Factor payments Consumption of domestically produced goods and services (C d ) Consumption of domestically produced goods and services (C d ) The circular flow of income Firms Households

8 The Circular Flow of Income n Withdrawals < net saving < net taxes < import expenditure n Injections < investment < government expenditure < export expenditure n Withdrawals < net saving < net taxes < import expenditure n Injections < investment < government expenditure < export expenditure

9 Factor payments Factor payments Consumption of domestically produced goods and services (C d ) Consumption of domestically produced goods and services (C d ) Investment (I) Government expenditure (G) Government expenditure (G) Export expenditure (X) Export expenditure (X) BANKS, etc Net saving (S) Net saving (S) GOV. Net taxes (T) Net taxes (T) ABROAD Import expenditure (M) Import expenditure (M) The circular flow of income WITHDRAWALS INJECTIONS

10 The Circular Flow of Income n The relationship between injections and withdrawals < the links between them n The relationship between injections and withdrawals < the links between them

11 Factor payments Factor payments Consumption of domestically produced goods and services (C d ) Consumption of domestically produced goods and services (C d ) Investment (I) Government expenditure (G) Government expenditure (G) Export expenditure (X) Export expenditure (X) BANKS, etc Net saving (S) Net saving (S) GOV. Net taxes (T) Net taxes (T) ABROAD Import expenditure (M) Import expenditure (M) The circular flow of income WITHDRAWALS INJECTIONS

12 The Circular Flow of Income n The relationship between injections and withdrawals < the links between them < planned injections may not equal planned withdrawals n The relationship between injections and withdrawals < the links between them < planned injections may not equal planned withdrawals

13 The Circular Flow of Income n The relationship between injections and withdrawals < the links between them < planned injections may not equal planned withdrawals n Equilibrium in the circular flow n The relationship between injections and withdrawals < the links between them < planned injections may not equal planned withdrawals n Equilibrium in the circular flow

14 Factor payments Factor payments Consumption of domestically produced goods and services (C d ) Consumption of domestically produced goods and services (C d ) Investment (I) Government expenditure (G) Government expenditure (G) Export expenditure (X) Export expenditure (X) BANKS, etc Net saving (S) Net saving (S) GOV. Net taxes (T) Net taxes (T) ABROAD Import expenditure (M) Import expenditure (M) The circular flow of income WITHDRAWALS INJECTIONS

15 The Circular Flow of Income n The relationship between injections and withdrawals < the links between them < planned injections may not equal planned withdrawals n Equilibrium in the circular flow n The circular flow and the four macroeconomic objectives n The relationship between injections and withdrawals < the links between them < planned injections may not equal planned withdrawals n Equilibrium in the circular flow n The circular flow and the four macroeconomic objectives

16 Factor payments Factor payments Consumption of domestically produced goods and services (C d ) Consumption of domestically produced goods and services (C d ) Investment (I) Government expenditure (G) Government expenditure (G) Export expenditure (X) Export expenditure (X) BANKS, etc Net saving (S) Net saving (S) GOV. Net taxes (T) Net taxes (T) ABROAD Import expenditure (M) Import expenditure (M) The circular flow of income WITHDRAWALS INJECTIONS

17 Measuring national income n GDP: the measure of national income n Methods of measuring GDP < the product approach < the income approach < the expenditure approach n GDP: the measure of national income n Methods of measuring GDP < the product approach < the income approach < the expenditure approach

18 The circular flow of national income and expenditure

19 (1) Production (2) Incomes (3) Expenditure

20 Measuring national income n GDP: the measure of national income n Methods of measuring GDP < the product approach < the income approach < the expenditure approach n The product approach n GDP: the measure of national income n Methods of measuring GDP < the product approach < the income approach < the expenditure approach n The product approach

21 Measuring national income n GDP: the measure of national income n Methods of measuring GDP < the product approach < the income approach < the expenditure approach n The product approach < measuring GVA n GDP: the measure of national income n Methods of measuring GDP < the product approach < the income approach < the expenditure approach n The product approach < measuring GVA

22 Agriculture, forestry and fishing £8 241 m Mining, energy and water supply £ m Manufacturing £ m Construction £ m Wholesale and retail trade; repairs £ m Hotels and restaurants £29 359m Transport and communication £ m Banking, finance, insurance, etc. £6 667 m Letting of property £ m Public administration and defence £ m Education, health and social work £ m Other services £ m UK GVA (product-based measure): 2001

23 Agriculture, forestry and fishing £8 241 m Mining, energy and water supply £ m Manufacturing £ m Construction £ m Wholesale and retail trade; repairs £ m Hotels and restaurants £29 359m Transport and communication £ m Banking, finance, insurance, etc. £6 667 m Letting of property £ m Public administration and defence £ m Education, health and social work £ m Other services £ m Total GVA £ m UK GVA (product-based measure): 2001

24 Agriculture, forestry and fishing £8 241 m Mining, energy and water supply £ m Manufacturing £ m Construction £ m Wholesale and retail trade; repairs £ m Hotels and restaurants £29 359m Transport and communication £ m Banking, finance, insurance, etc. £6 667 m Letting of property £ m Public administration and defence £ m Education, health and social work £ m Other services £ m Total GVA £ m Percentage of GVA UK GVA (product-based measure): 2001

25 Measuring national income n GDP: the measure of national income n Methods of measuring GDP < the product approach < the income approach < the expenditure approach n The product approach < measuring GVA n The income approach n GDP: the measure of national income n Methods of measuring GDP < the product approach < the income approach < the expenditure approach n The product approach < measuring GVA n The income approach

26 Compensation of employees (wages and salaries) £ m Operating surplus (gross profit, rent and interest of firms government and other institutions) £ m Mixed incomes £ m Tax less subsidies on production (other than those on products) plus statistical discrepancy £19 158m UK GVA by category of income: 2001

27 Compensation of employees (wages and salaries) £ m Operating surplus (gross profit, rent and interest of firms government and other institutions) £ m Mixed incomes £ m Tax less subsidies on production (other than those on products) plus statistical discrepancy £19 158m Total GVA £ m UK GVA by category of income: 2001

28 Compensation of employees (wages and salaries) £ m Operating surplus (gross profit, rent and interest of firms government and other institutions) £ m Mixed incomes £ m Tax less subsidies on production (other than those on products) plus statistical discrepancy £19 158m Total GVA £ m UK GVA by category of income: 2001 Percentage of GVA

29 Measuring national income n GDP: the measure of national income n Methods of measuring GDP < the product approach < the income approach < the expenditure approach n The product approach < measuring GVA n The income approach n From GVA to GDP n GDP: the measure of national income n Methods of measuring GDP < the product approach < the income approach < the expenditure approach n The product approach < measuring GVA n The income approach n From GVA to GDP

30 GVA (gross value added at basic prices)£ m UK GDP (product-based measure): 2001

31 GVA (gross value added at basic prices)£ m plus Taxes on products£ m UK GDP (product-based measure): 2001

32 GVA (gross value added at basic prices)£ m plus Taxes on products£ m less Subsidies on products £6 712m UK GDP (product-based measure): 2001

33 GVA (gross value added at basic prices)£ m plus Taxes on products£ m less Subsidies on products £6 712m GDP (at market prices)£ m UK GDP (product-based measure): 2001

34 Measuring national income n GDP: the measure of national income n Methods of measuring GDP < the product approach < the income approach < the expenditure approach n The product approach < measuring GVA n The income approach n The expenditure approach n GDP: the measure of national income n Methods of measuring GDP < the product approach < the income approach < the expenditure approach n The product approach < measuring GVA n The income approach n The expenditure approach

35 £million Consumption expenditure of households and NPISH (C) Government final consumption (G) Gross capital formation (I) Exports of goods and services (X) less Imports of goods and services (M) Statistical discrepancy499 Gross domestic product (GDP) (at market prices) UK GDP by category of expenditure, GNY and NNY: 2001

36 Measuring national income n GDP: the measure of national income n Methods of measuring GDP < the product approach < the income approach < the expenditure approach n The product approach < measuring GVA n The income approach < from GVA to GDP n From GDP to net national income (NNY) n GDP: the measure of national income n Methods of measuring GDP < the product approach < the income approach < the expenditure approach n The product approach < measuring GVA n The income approach < from GVA to GDP n From GDP to net national income (NNY)

37 £million Consumption expenditure of households and NPISH (C) Government final consumption (G) Gross capital formation (I) Exports of goods and services (X) less Imports of goods and services (M) Statistical discrepancy499 Gross domestic product (GDP) (at market prices) plus Net income from abroad5 756 Gross national income (GNY) UK GDP by category of expenditure, GNY and NNY: 2001

38 £million Consumption expenditure of households and NPISH (C) Government final consumption (G) Gross capital formation (I) Exports of goods and services (X) less Imports of goods and services (M) Statistical discrepancy499 Gross domestic product (GDP) (at market prices) plus Net income from abroad5 756 Gross national income (GNY) less Capital consumption (depreciation) Net national income (NNY) UK GDP by category of expenditure, GNY and NNY: 2001

39 Measuring national income n GDP as a measure of social welfare < benefits of using GDP < weaknesses n The Human Development Index (HDI) n GDP as a measure of social welfare < benefits of using GDP < weaknesses n The Human Development Index (HDI)

40 Human Development Index (HDI) for selected countries (2000)

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49 Growth and the Business Cycle n Growth in actual and potential growth n Economic growth and the business cycle < fluctuations in actual growth n Growth in actual and potential growth n Economic growth and the business cycle < fluctuations in actual growth

50 O National output Time Potential output The business cycle Actual output

51 n Growth in actual and potential output n Economic growth and the business cycle < fluctuations in actual growth < the phases of the business cycle n Growth in actual and potential output n Economic growth and the business cycle < fluctuations in actual growth < the phases of the business cycle Growth and the Business Cycle

52 O National output Time Potential output Actual output The business cycle

53 n Growth in actual and potential output n Economic growth and the business cycle < fluctuations in actual growth < the phases of the business cycle < trend growth n Growth in actual and potential output n Economic growth and the business cycle < fluctuations in actual growth < the phases of the business cycle < trend growth Growth and the Business Cycle

54 O National output Time Potential output Actual output Trend output The business cycle

55 n Growth in actual and potential growth n Economic growth and the business cycle < fluctuations in actual growth < the phases of the business cycle < long-term output trend < the business cycle in practice n Growth in actual and potential growth n Economic growth and the business cycle < fluctuations in actual growth < the phases of the business cycle < long-term output trend < the business cycle in practice Growth and the Business Cycle

56 n Growth in actual and potential growth n Economic growth and the business cycle < fluctuations in actual growth < the phases of the business cycle < long-term output trend < the business cycle in practice F the irregularity of the cycle n Growth in actual and potential growth n Economic growth and the business cycle < fluctuations in actual growth < the phases of the business cycle < long-term output trend < the business cycle in practice F the irregularity of the cycle Growth and the Business Cycle

57 n Growth in actual and potential growth n Economic growth and the business cycle < fluctuations in actual growth < the phases of the business cycle < long-term output trend < the business cycle in practice F the irregularity of the cycle F the length of the phases n Growth in actual and potential growth n Economic growth and the business cycle < fluctuations in actual growth < the phases of the business cycle < long-term output trend < the business cycle in practice F the irregularity of the cycle F the length of the phases Growth and the Business Cycle

58 n Growth in actual and potential growth n Economic growth and the business cycle < fluctuations in actual growth < the phases of the business cycle < long-term output trend < the business cycle in practice F the irregularity of the cycle F the length of the phases F the magnitude of the phases n Growth in actual and potential growth n Economic growth and the business cycle < fluctuations in actual growth < the phases of the business cycle < long-term output trend < the business cycle in practice F the irregularity of the cycle F the length of the phases F the magnitude of the phases Growth and the Business Cycle

59 n Causes of fluctuations in actual growth < aggregate demand < aggregate demand relative to potential output n Actual growth in practice < experience since 1970 n Causes of fluctuations in actual growth < aggregate demand < aggregate demand relative to potential output n Actual growth in practice < experience since 1970 Growth and the Business Cycle

60 Annual growth rate (%) UK Growth rates in selected industrial countries

61 Annual growth rate (%) UK Growth rates in selected industrial countries

62 Annual growth rate (%) UK France Growth rates in selected industrial countries

63 Annual growth rate (%) UK France Growth rates in selected industrial countries

64 Annual growth rate (%) UK France Germany Growth rates in selected industrial countries

65 Annual growth rate (%) UK France Germany Growth rates in selected industrial countries

66 Annual growth rate (%) UK France USA Germany Growth rates in selected industrial countries

67 Annual growth rate (%) UK France USA Germany Growth rates in selected industrial countries

68 Annual growth rate (%) UK France USA Germany Japan Growth rates in selected industrial countries

69 Annual growth rate (%) UK France USA Germany Japan Growth rates in selected industrial countries

70 n Causes of potential growth < increases in the quantity of factors F capital F labour F land and raw materials F the problem of diminishing returns < increases in factor productivity n Policies to achieve growth < demand-side and supply-side policies < market-orientated and interventionist policies n Causes of potential growth < increases in the quantity of factors F capital F labour F land and raw materials F the problem of diminishing returns < increases in factor productivity n Policies to achieve growth < demand-side and supply-side policies < market-orientated and interventionist policies Growth and the Business Cycle

71 Unemployment n The meaning of 'unemployment' n The costs of unemployment n Official measures of unemployment < claimant unemployment F do claimant statistics give a true picture of unemployment? < standardised unemployment (ILO / OECD) n The meaning of 'unemployment' n The costs of unemployment n Official measures of unemployment < claimant unemployment F do claimant statistics give a true picture of unemployment? < standardised unemployment (ILO / OECD)

72 Unemployment rates in selected industrial countries UK

73 Unemployment rates in selected industrial countries

74 UK France Unemployment rates in selected industrial countries

75 UK France Unemployment rates in selected industrial countries

76 UK France Germany Unemployment rates in selected industrial countries

77 UK France Germany Unemployment rates in selected industrial countries

78 UK France USA Germany Unemployment rates in selected industrial countries

79 UK France USA Germany Unemployment rates in selected industrial countries

80 UK France USA Germany Japan Unemployment rates in selected industrial countries

81 UK France USA Germany Japan Unemployment rates in selected industrial countries

82 UK France USA Germany Japan OECD Unemployment rates in selected industrial countries

83 UK France USA Germany Japan OECD Unemployment rates in selected industrial countries

84 Standardised unemployment rates in different sectors of the labour market (2002)

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88 Unemployment n Unemployment and the labour market < the aggregate demand and supply of labour < equilibrium in the model n Unemployment and the labour market < the aggregate demand and supply of labour < equilibrium in the model

89 QeQe Disequilibrium unemployment O Average (real) wage rate No. of workers AS L AD L WeWe

90 Unemployment n Unemployment and the labour market < the aggregate demand and supply of labour < equilibrium in the model < disequilibrium unemployment n Unemployment and the labour market < the aggregate demand and supply of labour < equilibrium in the model < disequilibrium unemployment

91 O Average (real) wage rate No. of workers AS L AD L WeWe W2W2 Disequilibrium unemployment Q2Q2 Q1Q1 BA

92 Unemployment n Unemployment and the labour market < the aggregate demand and supply of labour < equilibrium in the model < disequilibrium unemployment < equilibrium unemployment n Unemployment and the labour market < the aggregate demand and supply of labour < equilibrium in the model < disequilibrium unemployment < equilibrium unemployment

93 Equilibrium unemployment O Average (real) wage rate No. of workers AD L WeWe AS L e QeQe

94 Q2Q2 QeQe O Average (real) wage rate No. of workers AS L AD L WeWe N e d Equilibrium unemployment

95 Equilibrium and disequilibrium unemployment O Average (real) wage rate No. of workers AD L WeWe e QeQe AS L

96 O Average (real) wage rate No. of workers AS L AD L WeWe W2W2 ba e Disequilibrium unemployment Equilibrium and disequilibrium unemployment

97 O Average (real) wage rate No. of workers AS L AD L WeWe W2W2 ba e N c Equilibrium unemployment Disequilibrium unemployment Equilibrium and disequilibrium unemployment

98 Unemployment n Disequilibrium unemployment < real-wage (classical) unemployment < demand-deficient (cyclical) unemployment < unemployment arising from a growth in the labour supply n Disequilibrium unemployment < real-wage (classical) unemployment < demand-deficient (cyclical) unemployment < unemployment arising from a growth in the labour supply

99 Unemployment n Equilibrium unemployment < frictional (search) unemployment < structural unemployment F changing pattern of demand F technological unemployment F regional unemployment < seasonal unemployment n Equilibrium unemployment < frictional (search) unemployment < structural unemployment F changing pattern of demand F technological unemployment F regional unemployment < seasonal unemployment

100 Aggregate Demand and Supply n The aggregate demand curve

101 O Price level National output AD Aggregate demand and aggregate supply

102 Aggregate Demand and Supply n The aggregate demand curve < Why aggregate demand curves slope downwards n The aggregate demand curve < Why aggregate demand curves slope downwards

103 Aggregate Demand and Supply n The aggregate demand curve < Why aggregate demand curves slope downwards F import effect n The aggregate demand curve < Why aggregate demand curves slope downwards F import effect

104 O Price level National output AD Aggregate demand and aggregate supply

105 Aggregate Demand and Supply n The aggregate demand curve < Why aggregate demand curves slope downwards F import effect F interest-rate effect n The aggregate demand curve < Why aggregate demand curves slope downwards F import effect F interest-rate effect

106 O Price level National output AD Aggregate demand and aggregate supply

107 Aggregate Demand and Supply n The aggregate demand curve < Why aggregate demand curves slope downwards F import effect F interest-rate effect F savings effect n The aggregate demand curve < Why aggregate demand curves slope downwards F import effect F interest-rate effect F savings effect

108 O Price level National output AD Aggregate demand and aggregate supply

109 Aggregate Demand and Supply n The aggregate demand curve < Why aggregate demand curves slope downwards F import effect F interest-rate effect F savings effect n The aggregate supply curve n The aggregate demand curve < Why aggregate demand curves slope downwards F import effect F interest-rate effect F savings effect n The aggregate supply curve

110 O Price level National output AS AD Aggregate demand and aggregate supply

111 Aggregate Demand and Supply n The aggregate demand curve < Why aggregate demand curves slope downwards F import effect F interest-rate effect F savings effect n The aggregate supply curve < Why aggregate supply curves generally slope upwards n The aggregate demand curve < Why aggregate demand curves slope downwards F import effect F interest-rate effect F savings effect n The aggregate supply curve < Why aggregate supply curves generally slope upwards

112 O Price level National output AS AD Aggregate demand and aggregate supply

113 Aggregate Demand and Supply n The aggregate demand curve < Why aggregate demand curves slope downwards F import effect F interest-rate effect F savings effect n The aggregate supply curve < Why aggregate supply curves generally slope upwards n Equilibrium n The aggregate demand curve < Why aggregate demand curves slope downwards F import effect F interest-rate effect F savings effect n The aggregate supply curve < Why aggregate supply curves generally slope upwards n Equilibrium

114 O Price level National output AS AD PePe Aggregate demand and aggregate supply

115 O Price level National output AS AD PePe P2P2 a b Aggregate demand and aggregate supply

116 Aggregate Demand and Supply n The aggregate demand curve < Why aggregate demand curves slope downwards F import effect F interest-rate effect F savings effect n The aggregate supply curve < Why AS curves generally slope upwards n Equilibrium < Effect of a shift in the AD curve n The aggregate demand curve < Why aggregate demand curves slope downwards F import effect F interest-rate effect F savings effect n The aggregate supply curve < Why AS curves generally slope upwards n Equilibrium < Effect of a shift in the AD curve

117 Inflation n Defining inflation n The costs of inflation < redistribution < uncertainty < balance of payments < resources used to cope with inflation n Experience of inflation since 1965 n Defining inflation n The costs of inflation < redistribution < uncertainty < balance of payments < resources used to cope with inflation n Experience of inflation since 1965

118 UK Inflation rates in selected industrial countries

119 UK Inflation rates in selected industrial countries

120 UK EU 15 Inflation rates in selected industrial countries

121 UK EU 15 Inflation rates in selected industrial countries

122 UK EU 15 USA Inflation rates in selected industrial countries

123 UK EU 15 USA Inflation rates in selected industrial countries

124 UK EU 15 Japan USA Inflation rates in selected industrial countries

125 UK EU 15 Japan USA Inflation rates in selected industrial countries

126 UK EU 15 Japan USA OECD Inflation rates in selected industrial countries

127 UK EU 15 Japan USA OECD Inflation rates in selected industrial countries

128 Inflation n Types of inflation < demand pull n Types of inflation < demand pull

129 Demand-pull inflation O Price level National output AS AD 1 P1P1 Q1Q1

130 O Price level National output AS AD 1 P1P1 Q1Q1 AD 2 Demand-pull inflation

131 O Price level National output AS AD 1 P1P1 Q1Q1 AD 2 P2P2 Q2Q2 Demand-pull inflation

132 Inflation n Types of inflation < demand pull < cost push n Types of inflation < demand pull < cost push

133 Inflation n Types of inflation < demand pull < cost push F wage push n Types of inflation < demand pull < cost push F wage push

134 Inflation n Types of inflation < demand pull < cost push F wage push F profit push n Types of inflation < demand pull < cost push F wage push F profit push

135 Inflation n Types of inflation < demand pull < cost push F wage push F profit push F import-price push n Types of inflation < demand pull < cost push F wage push F profit push F import-price push

136 Cost-push inflation O Price level National output AS 1 AD P1P1 Q1Q1

137 O Price level National output AS 1 AD P1P1 Q1Q1 AS 2 Cost-push inflation

138 O Price level National output AS 1 AD P1P1 Q1Q1 AS 2 P2P2 Q2Q2 Cost-push inflation

139 Inflation n Types of inflation < demand pull < cost push F wage push F profit push F import-price push < the interaction of demand-pull and cost- push inflation n Types of inflation < demand pull < cost push F wage push F profit push F import-price push < the interaction of demand-pull and cost- push inflation

140 The interaction of demand-pull and cost-push inflation O Price level National output AS 1 AD 1 P1P1

141 O Price level National output AS 1 AD 1 P1P1 AS 2 AD 2 P2P2 The interaction of demand-pull and cost-push inflation

142 O Price level National output AS 1 AD 1 P1P1 AD 2 P2P2 AS 3 AD 3 P3P3 AS 2 The interaction of demand-pull and cost-push inflation

143 Inflation n Types of inflation < demand pull < cost push F wage push F profit push F import-price push < structural (demand shift) n Types of inflation < demand pull < cost push F wage push F profit push F import-price push < structural (demand shift)

144 Inflation n Types of inflation < demand pull < cost push F wage push F profit push F import-price push < structural (demand shift) < expectations and inflation n Types of inflation < demand pull < cost push F wage push F profit push F import-price push < structural (demand shift) < expectations and inflation

145 Inflation n Types of inflation < demand pull < cost push F wage push F profit push F import-price push < structural (demand shift) < expectations and inflation n Policies to tackle inflation n Types of inflation < demand pull < cost push F wage push F profit push F import-price push < structural (demand shift) < expectations and inflation n Policies to tackle inflation

146 Inflation n Types of inflation < demand pull < cost push F wage push F profit push F import-price push < structural (demand shift) < expectations and inflation n Policies to tackle inflation < demand-side policies n Types of inflation < demand pull < cost push F wage push F profit push F import-price push < structural (demand shift) < expectations and inflation n Policies to tackle inflation < demand-side policies

147 Inflation n Types of inflation < demand pull < cost push F wage push F profit push F import-price push < structural (demand shift) < expectations and inflation n Policies to tackle inflation < demand-side policies < supply-side policies n Types of inflation < demand pull < cost push F wage push F profit push F import-price push < structural (demand shift) < expectations and inflation n Policies to tackle inflation < demand-side policies < supply-side policies


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