Chapter 19

Introduction to macroeconomics

David Begg, Stanley Fischer and Rudiger Dornbusch, Economics,

8th Edition, McGraw-Hill, 2005
PowerPoint presentation by Alex Tackie and Damian Ward

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 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.

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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

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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

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Inflation in the UK, 1950-2003

30
25
20
% p.a.

15
10
5
0
1950

1960

1970

1980

1990

2000
Source: Economic Trends Annual Supplement, Labour Market Trends
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 Inflation in UK, USA and Germany
1960 - 2004

16
14
12
10
UK
Annual % 8 USA
6 Germany

4
2
0
1960-73 1973-81 1981-90 1990-01 2001-04

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 Unemployment in the UK
1950-2003

14
12
10
8
% p.a.

6
4
2
0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Source: Economic Trends Annual Supplement, Labour Market Trends

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 Unemployment
in UK, USA and Germany
10

6
% p.a.

0
1960-73 1973-81 1981-90 1990-01 2001-04

UK USA Germany

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 Economic growth
in UK, USA and Germany
5

3
% p.a.

0
1960-73 1973-81 1981-90 1990-01 2001-04

UK USA Germany

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 The circular flow of income,
expenditure and output

C C+I
S

Households Firms

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Government in the circular flow
I
C+I+G C + I + G - Te
C
S G
Te

Households Government Firms

B - Td
Y + B - Td Y

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 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.

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 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

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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
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National income accounting: a summary

NYA NYA Deprec'n

G Indirect
GNP taxes
(and I Profits,
GDP rents
GNI) NX at NNP
Self-
at market at basic National employment
market prices prices income
prices C Wages
and
salaries

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 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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