1. Introduction to Economics
Egor Sidorov

2. Gross domestic product (GDP) Nominal vs. real GDP GDP critiques
Aggregate demand
Aggregate supply
Gross domestic product (GDP)
Nominal vs. real GDP
GDP critiques

3. Roles of economic agents in AD and AS
Subject
Supplies (offers)
Demands
Household
Production factors
Goods and services
Firm
State
Public goods
Production factors,
Foreign country
Imported goods and sevices, foreign PF
Exported goods and services, domestic PF
V ekonomice má každý subjekt svou roli na straně poptávky i na straně nabídky. Aby něco mohl poptávat, musí „na oplátku“ něco jiného nabídnout. To je logický princip tržního hospodářství založeného na směně hodnot.

4. Aggregate Demand – AD
AD is an amount of products the market agents are willing to buy given the price level.
Aggregate demand consists of :
Demand for final goods and services by households (C),
Demand for production factors by firms (Ig),
Demand for production factors by government (G),
Demand for net exports by foreign agents (X). Q P AD
110 % C I G X
100 %

5. Factors influencing AD (1)
Consumption (C) is determined by disposable income (personal income after taxes) and wealth of consumers. If the price level goes up, the wealth goes down. Demographical changes also influence consumption.
Investment (I) is determined by such factors as production level, capital costs and future expectations of investors. Monetary policy influences the investment level.

6. Factors influencing AD (2)
Governmental expenditures (G) – their level is determined by governmental decisions about budgetary expenditures.
Net export (X) is a difference between export and import. Main factors influencing net export are relation between domestic and foreign price level and exchange rates. Economic growth abroad leads to increase of export.

7. Gross domestic product (GDP) Nominal vs. real GDP GDP critiques
Aggregate demand
Aggregate supply
Gross domestic product (GDP)
Nominal vs. real GDP
GDP critiques 7

8. Aggregate Supply – AS
AS is a total amount of product, which firms and households are willing to supply given the price and wage level.
The supply consists of:
Supply of goods and services by firms,
Supply of production factors by households,
Services of the state,
Foreign imports. P AS
Potential product – refers to the full capacity of the given economy with full employment and full resource use.
110 %
100 % Qr Qp

9. Factors influencing AS and potential product
Production factors (L, R, K),
Technology:
Increases potential product,
Price level and exchange rates,
Exchange rate depreciation makes national currency relatively cheaper and increases export.
State economic policy:
E.g. high taxes may force part of suppliers to leave the market, custom fees defend domestic producers.
Market agents’ expectations:
E.g. willingness to start business, to invest and to save.

10. Macroekonomic equilibrium
Actual output (product) = what is being produced due to AD and AS „negotiations“
Potential output (product) = what could be produced in the long run if we utilize all available production factors P Y AD AS P Y E PE  YE Y*

11. AS curve shape. Keynes vs. Neoclassics
2 controversial economic schools:
Keynes's economics,
Neoclassical economics.
Outgoing points:
Main discussion is about wage and price flexibility.
and possibility of state to intervene into economics. Q P AS Qp

12. Neoclassical school (1)
The main source of inefficiency is state interventions, especially those redistributing factors form private to public sector (supporting less efficient governmental investments instead of private investment).
Traditional market economics. “Optimistic viewpoint” stating that the economics is healthy and is on its potential (Qp) ► market mechanism efficiently allocates production factors and market self-regulations enables long-run efficiency and performance with no need of state interventions. Q P AS
Classical shape of AS where wages and prices are flexible Qp

13. Keynesian school (1)
The Keynesian theory was developed at the time of economic crisis between the two world wars and therefore has a “pessimist” viewpoint ► assumes that the economy is under its potential and is not able of allocating scarce resources by using only market forces (therefore e.g. unemployment exists) ► state interventions are necessary.
John Maynard Keynes

14. Impacts of AD stimulation in neoclassic and keynesian conceptsPE
YE1
YE2 Y*

15. Gross domestic product (GDP) Nominal vs. real GDP GDP critiques
Aggregate demand
Aggregate supply
Gross domestic product (GDP)
Nominal vs. real GDP
GDP critiques 19

16. Economic performance: Product of the society
“Measuring smth means knowing smth about it; if one can’t express smth in numbers, it means our knowledge isn’t sufficient.”
National economic performance is reflected by the amount of goods and service (in money units) produced during the accounting period (e.g. a year).
Lord Kelvin (William Thomson)
1824 – 1907, UK

17. Gross domestic product (GDP)
Monetary value of final goods and services produced during the accounting period (e.g. a year) by production factors situated on the territory of the country no matter who their owner is.
Gross National Product (or Income) – total value of goods and services produced by production factors owned by the nation.
Czech GDP includes output of Czech and foreign companies on the Czech territory.

18. GDP =  Output –  inter. consumption =  Value Added
Calculating GDP
Production approach
Expenditure approach
Income approach
GDP as a sum of final goods and services used for final consumption.
GDP omits intermediate consumption, which reflects value of products used for further production processes.
CZK 100
CZK 150
CZK 200
GDP =  Output –  inter. consumption =  Value Added

19. Expenditure approach
All goods and services sold during the accounting period; those include expenditures of
Households (C = consumption):
Households’ final consumption;
Consumer goods (excluding dwellings!).
Government (G = government expenditure):
Building infrastructure, defense, education, etc. (excluding transfers – pensions, social support, etc.).
Firms – (Ig = Gross Investment):
Gross investments into machines, buildings, etc.
Net export (Ex-Im) = export minus import):
Difference between value of goods exported and imported.
GDP = C + Ig + G + Ex-Im

20. Capital services theory
Capital generates flow of services and depreciates.
Depreciation equals to capital value loss over accounting period.
Net investments increase capital stock
Profit
Other costs
Renewing investments (=depreciation) return capital stock to initial level

21. GDP as a flow of capital services
The stock of national capital generates flow of goods and services, i.e. GDP.
Gross investment is equal to net investment plus depreciation.
Depreciation + Net invetsment
GDP = C + Ig + G + Ex-Im
Capital stock
Services

22. Gross domestic product vs. Net domestic product
Net domestic product has a more representative character
Net Domestic Product – NDP
NDP is calculated as GDP less depreciation.
NDP shows the net income, in other words the true level of how the society is better off in this year compared to previous accounting period.
NDP = GDP - Depreciation
NDP = C + In + G + Ex-Im
Only net investment

23. Gross domestic product (GDP) Nominal vs. real GDP GDP critiques
Aggregate demand
Aggregate supply
Gross domestic product (GDP)
Nominal vs. real GDP
GDP critiques 29

24. > = < 20 CZK 11 CZK 2009 1995 Nominal vs. real GDP
Nominal GDP is calculated in current prices;
Therefore these indicators are incomparable in time; the solution is calculating GDP in basic prices.
20 CZK
11 CZK
> =
<
2009
1995

25. Deflator
Is a complex price index. Incorporates price changes of all goods and services in the economy.
Price level 2009
Deflator =
Price level 1995 20
Deflator = = 1,81 = 181 % 11

26. = Real GDP One can use deflator to calculate the real GDP
Nominal GDP in current 2009 prices
Real GDP =
Deflator 2009/1995 20
Real GDP = = 11 Kč
1,81 =
1995
2009

27. Gross domestic product (GDP) Nominal vs. real GDP GDP critiques
Aggregate demand
Aggregate supply
Gross domestic product (GDP)
Nominal vs. real GDP
GDP critiques 33

28. GDP Is an important indicator of economic activity,
Shows if the country is a developed or developing,
Enables getting support from international organizations.
Is generally (however mistakenly) regarded to be an indicator of well-being.

29. GDP critiques
HDP = C + Ig + G + Ex-Im
GDP reflects only those human activities, which are part of market transactions.
GDP ignores everything beyond money exchange.
E.g. environmental services are not traded in the market.
Yearly environmental services = 500 x GDP

30. GDP critiques Omits goods and services produced for own consumption
Omits goods and services produced on the black market
Illegal activities as drug dealing, prostitution, media piracy, etc.

31. GDP critiques
GDP makes no difference between productive and destructive activities.
It grows before and after the war, it goes up in connection with natural disasters, divorces, criminal activity, environmental pollution and abatement, etc.

32. Alternative indicators
e.g. Net Economic Welfare (NEW) – is an adjusted measure of well-being improving some shortcomings of GDP.
NEW = GDP + + value of the free time + black market production value + goods and services for own consumption + … – natural resource depletion – non-productive commercials – commuting expenses – …

33. GDP: conclusion GDP is an important indicator of economic activity.
GDP growth, however, doesn’t necessarily mean that the nation is better off.

34. Thank you for attention!
Refernces:
SAMUELSON, P. A., NORDHAUS, W. D. Ekonomie 18. vydání. Praha: Svoboda, 2005.
KRAFT, J., RITSCHELOVÁ, I. Ekonomie pro environmentální management. Ústí n. L.: UJEP, 2003.
MCDOUGAL LITTELL. Economics: Concept and Choices. Canada: McDougal Littell, 2008.