economics for business

Chapter 9
Introduction to the
macroeconomy
 Learning Outcomes
Economic Theory

• The key concepts of GDP, inflation, unemployment and

the balance of payments.
• The concept of the business cycle.
• The circular flow of income.
• Leakages and injections.
• Aggregate demand and aggregate supply.
• How changes in aggregate demand and supply lead to
changes in equilibrium GDP and inflation.
 Learning Outcomes
Business Applications

•Optimize investment decisions by

understanding the business cycle.
•Use income elasticities to profit during a
recession.
•Find, interpret, and use data on aggregate
demand.
 Business Problem

• Business cycles and economic uncertainty.

• Business cycle:
– Variations in economic activity.
• Problems relating to business confidence,
consumer confidence, investment and product
planning.
Business cycles and economic
activity
Macroeconomic Issues
Key Macroeconomic Inputs
 Comment and Analysis

• Compare and contrast 2014 with 2000.

• What are governments’ macroeconomic
objectives?
• What determines the variation in GDP,
inflation, etc.?
The Circular Flow of Income
 Leakages and Injections

• Leakage – income not spent on goods and

services within the economy:
– Savings, taxation, imports.

• Injection – additional spending that does not

come from income:
– Investment, government spending, exports.
Circular Flow with Injections and
Leakages
 Total Expenditure

• Sources of spending in the economy:

– Consumption.
– Investment.
– Government spending.
– Net export (export-import).
National Income Determination

• Macroeconomics examines the entire

economy.
• So, why not think of the macroeconomy as
one big market?
– Demand = aggregate demand.
– Supply = aggregate supply.
– Output = GDP.
– Price = price level or perhaps inflation.
 Aggregate Demand
Aggregate demand and inflation.

Inflation


AD = C+I+G+NX


Y2 Y1 National output
 Shifts in Aggregate Demand
Aggregate demand, inflation and increased government spending.

Inflation


AD2 = C+I+G2+NX

AD1 = C+I+G1+NX
Y1 Y2 National output
Aggregate Supply: Real and Nominal
Prices

• The difference between nominal and

real.
• Nominal Prices are not adjusted for
inflation.
• Real Prices are adjusted for inflation.
Aggregate Supply: With and Without Full
Adjustment to Prices
Macroeconomic Equilibrium
Changes to the Macro Equilibrium and
Prices
 Business Application:
Predicting the Business Cycle
 Business Application:
Profiting from Recession

• Income elasticity.
• Pricing.
• Managing costs.
• Diversified portfolio.
Business Data Application: Data on Key
Components of Aggregate Demand

• International Monetary Fund (IMF).

• Organization for Economic Co-operation and
Development (OECD).
• For the UK only:
– Office for National Statistics.
– Office for Budgetary Responsibility.
– Bank of England.
 Exercises
• True or false?
a) Savings provide an injection into the circular flow of income.
b) Total expenditure in an economy is equal to consumption, investment,
government spending and exports.
c) Under complete wage adjustment aggregate supply is unresponsive to a
change in inflation.
d) Higher inflation will lead central banks to increase interest rates. This
explains a negative relationship between inflation and aggregate
demand.
e) The main injections into the circular flow of income are investment and
government spending.
f) Diversifying macroeconomic risk through normal and inferior products
is beneficial for shareholders.
 Summary
You should now be able to:
•Discuss the key topics of GDP, inflation, unemployment and the
balance of payments.
•Explain what is meant by the term business cycle.
•Provide a discussion of the circular flow of income, highlighting the
various relationships between firms, households, government and
international economies.
•Explain the difference between leakages and injections.
•Explain the determinants of aggregate demand.
•Discuss whether or not aggregate supply will be perfectly inelastic.
•Explain how changes in aggregate demand and supply can explain the
business cycle.
 Summary
You should have investigated the business
applications of:
•Exploiting various income elasticities
throughout the business cycle.
•Forecasting the business cycle.
•Finding, interpreting and using data on
aggregate demand.