© The McGraw-Hill Companies, 2008 Chapter 19 Introduction to macroeconomics David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 9th Edition, McGraw-Hill, 2008 PowerPoint presentation by Alex Tackie and Damian Ward

© The McGraw-Hill Companies, 2008 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, 2008 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, 2008 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

© The McGraw-Hill Companies, 2008 Inflation in Turkey Source: TEPAV

© The McGraw-Hill Companies, 2008 Inflation in UK, USA and Germany

© The McGraw-Hill Companies, 2008 Unemployment in Turkey

© The McGraw-Hill Companies, 2008 Unemployment in UK, USA and Germany

© The McGraw-Hill Companies, 2008 Economic Growth in Turkey

© The McGraw-Hill Companies, Economic Growth in the World

© The McGraw-Hill Companies, 2008 The Sectoral Division of GDP in Turkey

© The McGraw-Hill Companies, 2008 Economic growth in UK, USA and Germany

© The McGraw-Hill Companies, 2008 Circular Flow Diagram Circular Flow Diagram shows how the resources and products flow between households, firms and the government.

© The McGraw-Hill Companies, 2008 The Circular-Flow Diagram Firms – Produce and sell goods and services – Hire and use factors of production Households – Buy and consume goods and services – Own and sell factors of production

© The McGraw-Hill Companies, 2008 The Circular-Flow Diagram Markets for Goods and Services – Firms sell – Households buy Markets for Factors of Production – Households sell – Firms buy

© The McGraw-Hill Companies, 2008 The Circular-Flow Diagram Factors of Production – Inputs used to produce goods and services – Land, labor, and capital

© The McGraw-Hill Companies, 2008 The circular flow of income, expenditure and output Y HouseholdsFirms C + I IC S

© The McGraw-Hill Companies, 2008 Circular Flow Diagram 18 HoseholdFirms Factoral Income (Y) = 7000 Factors of Production Savings (S) = 2000 Consumption (C) = 5000 Goods and Servies Investment (I) = 2000

© The McGraw-Hill Companies, 2008 Closed Economy without Government Y=C+I Households earn 7000 because they own factors of production They spend 5000 and save 2000 So, –Y= C+S The savings are used for investment So, –S = I is the case. –Y = C+ I –In other words, the output (Y) can be used for consumtion (C) and investment (I). 19

© The McGraw-Hill Companies, 2008 Investment and Savings Investment (I), is the spending for acquiring newly produced physical capital. –Buying an old factory is not an investment for the economy. Savings (S), household income minus the consumption If the savings are not under the pillow then,S = I is always the case. 20

© The McGraw-Hill Companies, 2008 Gross Domestic Product The market value of final goods and services that are produced in a country within a specified time by the residents of a country. Final goods and services: We have to exclude the intermediate products in order not to have double counting problem. Value added: The increase in value at the end of the production process. 21

© The McGraw-Hill Companies, 2008 Examples Ice-cream is a final good if it is consumed by the households. Steel is an intermediate good because it will be used for industries such as auto sector in the later stages. The stocks are counted as final good. Machinary is a final good because the firms are the final users for these products. 22

© The McGraw-Hill Companies, 2008 Adding Goverment into the Circular Flow Diagram What happens if we add government to the circular flow diagram – The government collects indirect taxes from consumption and direct taxes from income and uses for government purchases and transfer payments. Indirect taxes: T e Direct taxes: T d Government expenditure:G Transfers:B 23

© The McGraw-Hill Companies, 2008 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, 2008 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, 2008 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, 2008 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, 2008 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