Chapter 15 Introduction to macroeconomics ©McGraw-Hill Companies, 2010

©McGraw-Hill Companies, 2010 Macroeconomics is ... the study of the economy as a system it deals with broad aggregates but uses the same style of thinking about economic issues as in microeconomics. ©McGraw-Hill Companies, 2010 2

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 ©McGraw-Hill Companies, 2010 3

More key issues in macroeconomics Economic growth increases in real GNP, an indication of the expansion of the economy’s total output Macroeconomic policy a variety of policy measures used by the government to affect the overall performance of the economy ©McGraw-Hill Companies, 2010 4

©McGraw-Hill Companies, 2010 Inflation in the UK, 1960-2010 Source: Economic Trends Annual Supplement, Labour Market Trends ©McGraw-Hill Companies, 2010 5

Unemployment in UK and USA ©McGraw-Hill Companies, 2010 6

Government in the circular flow Y C + I + G I C S Households Firms Government C + I + G - Te Te G B - Td Y + B - Td ©McGraw-Hill Companies, 2010 7

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. ©McGraw-Hill Companies, 2010 8

©McGraw-Hill Companies, 2010 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 ©McGraw-Hill Companies, 2010 9

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 ©McGraw-Hill Companies, 2010 10

National income accounting: a summary NYA: Net income from abroad GNP (& GNI) at market prices NYA NYA Depre- ciation G GDP at market prices NNP at basic prices Indirect taxes I National income rental income NX Profits Self- employment C Wages and salaries ©McGraw-Hill Companies, 2010 11

UK national accounts 2008 (£bn, current prices) Income measure At market prices:   Income source Employment 770 C by households 891 Profits and rents 429 C by government and non-profit organizations   350 Other 83 I by private firms and government 245 GDP at basic prices 1282 NX –40 Indirect taxes  164 GDP at market prices 1446 Net property income from abroad   25 GNP (GNI) at market prices 1471 Source: www.statistics.gov.uk ©McGraw-Hill Companies, 2010 12

What GNP does & doesn’t 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 ©McGraw-Hill Companies, 2010 13

©McGraw-Hill Companies, 2010 GNP Deflator The GNP deflator is the ratio of nominal GNP to real GNP, expressed as an index. 1960 1995 2008 Nominal GNP (Current £bn) 25 750 1471 GNP deflator (1995=100) 8 100 141 Real GNP (£bn 1995 prices) 316 750 1043 ©McGraw-Hill Companies, 2010 14

GNP per capita: Growth, 1980–2008 (% per annum) Real GNP Per capita real GNP Denmark 2.3 2.2 UK 2.7 2.3 Jordan 4.1 0.1 Source: World Bank ©McGraw-Hill Companies, 2010 15

©McGraw-Hill Companies, 2010 Tax evasion The hidden economy is often linked to tax evasion. Taxes are evaded by smugglers and drug dealers but also by gardeners, plumbers and everyone else doing things ‘for cash’. Since GNP data are based on tax statistics, the ‘hidden’ economy is unreported. This means that official GNP statistics may substantially understate the true value of GNP. Estimating the size of the hidden economy is obviously difficult. ©McGraw-Hill Companies, 2010

Recent estimates by Schneider, Buehn and Montenegro United States 9.0% UK 13.2% China 14.3% Germany 16.7% Spain 23.1% India 25.6% Poland 29.1% Georgia 72.5% As a percentage "official" gross domestic product ©McGraw-Hill Companies, 2010