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© The McGraw-Hill Companies, 2002 0 Macroeconomics is... the study of the economy as a whole it deals with broad aggregates but uses the same style of thinking about economic issues as in microeconomics.
© The McGraw-Hill Companies, 2002 1 Some key issues in macroeconomics Inflation –the rate of change of the general price level Unemployment –a measure of the number of people looking for work, but who are without jobs Output –real gross national product (GNP) measures total income of an economy it is closely related to the economy's total output
© The McGraw-Hill Companies, 2002 2 More key issues in macroeconomics Economic growth –increases in real GNP, an indication of the expansion of the economys total output Macroeconomic policy –a variety of policy measures used by the government to affect the overall performance of the economy
© The McGraw-Hill Companies, 2002 3 Inflation in the UK, 1950-2000 Source: Economic Trends Annual Supplement, Labour Market Trends
© The McGraw-Hill Companies, 2002 4 Inflation in UK, USA and Germany 1960 - 2001
© The McGraw-Hill Companies, 2002 5 Unemployment in the UK 1950-2000 Source: Economic Trends Annual Supplement, Labour Market Trends
© The McGraw-Hill Companies, 2002 6 Unemployment in UK, USA and Germany
© The McGraw-Hill Companies, 2002 7 Economic growth in UK, USA and Germany
© The McGraw-Hill Companies, 2002 8 The circular flow of income, expenditure and output Y HouseholdsFirms C + I IC S
© The McGraw-Hill Companies, 2002 9 Government in the circular flow Y C + I + G I C S HouseholdsFirmsGovernment C + I + G - T e TeTe G B - T d Y + B - T d
© The McGraw-Hill Companies, 2002 10 Adding the foreign sector To incorporate the foreign sector into the circular flow we must recognise that residents of a country will buy imports from abroad and that domestic firms will sell (export) goods and services abroad.
© The McGraw-Hill Companies, 2002 11 GDP and GNP Gross domestic product (GDP) –measures the output produced by factors of production located in the domestic economy Gross national product (GNP) –measures the total income earned by domestic citizens GNP = GDP + net income from abroad
© The McGraw-Hill Companies, 2002 12 Three measures of national output Expenditure –the sum of expenditures in the economy –Y = C + I + G + X - Z Income –the sum of incomes paid for factor services –wages, profits, etc. Output –the sum of output (value added) produced in the economy
© The McGraw-Hill Companies, 2002 13 National income accounting: a summary GNP (and GNI) at market prices GDP at market prices NYA C NX I NYA G NNP at basic prices Deprec'n National income Indirect taxes Wages and salaries Self- employment Profits, rents
© The McGraw-Hill Companies, 2002 14 What GNP does and does not measure Some care is needed: –to distinguish between real and nominal measurements –to take account of population changes –to remember that GNP is not a comprehensive measure of everything that contributes to economic welfare
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