ad as macro

8/8/2019 Ad as Macro

1/147

Aggregate Demand

and Supply andMacroeconomic

Problems

Aggregate Demand

and Supply andMacroeconomic

Problems


2/147

Macroeconomic ObjectivesMacroeconomic Objectives

s Distinction between microeconomicsand macroeconomics

s The major macroeconomic issues

( economic growth

( unemployment

( inflation

( balance of payments and exchange rates

3 balance of payments deficits and surpluses

3 exchange rate movements

s Distinction between microeconomicsand macroeconomics

s The major macroeconomic issues

( economic growth

( unemployment

( inflation

( balance of payments and exchange rates

3balance of payments deficits and surpluses

3 exchange rate movements


3/147

Economic growth (average % per annum),

Unemployment (average %), Inflation (average % per annum)




4/147






5/147






6/147

The Circular Flow of IncomeThe Circular Flow of Income

s The inner flows The inner flow


7/147

Factor

payments

Factor

payments

Consumption of

domestically

produced goods

and services (Cd)

Consumption of

domestically

produced goods

and services (Cd)

The circular flow of incomeThe circular flow of income

Firms

Households


8/147


s Withdrawals( net saving

( net taxes

( import expenditure

s Injections

(

investment( government expenditure

( export expenditure

s Withdrawals( net saving

( net taxes

( import expenditure

s Injections

(

investment( government expenditure

( export expenditure


9/147

Factor

payments

Factor

payments

Consumption of

domestically

produced goods

and services (Cd)

Consumption of

domestically

produced goods

and services (Cd)

Investment (I)Investment (I)

Government

expenditure (G)

Government

expenditure (G)

Export

expenditure (X)

Export

expenditure (X)

BANKS, etc

Net

saving (S)

Net

saving (S)

GOV.

Nettaxes (T)

Nettaxes (T)

ABROAD

Import

expenditure (M)

Import

expenditure (M)


WITHDRAWALS

INJECTIONS


10/147


s The relationship between injections andwithdrawals( the links between them

s The relationship between injections andwithdrawals( the links between them


11/147

Factor

payments

Factor

payments

Consumption of

domestically

produced goods

and services (Cd)

Consumption of

domestically

produced goods

and services (Cd)


Government

expenditure (G)

Government

expenditure (G)

Export

expenditure (X)

Export

expenditure (X)

BANKS, etc

Net

saving (S)

Net

saving (S)

GOV.

Nettaxes (T)

Nettaxes (T)

ABROAD

Import

expenditure (M)

Import

expenditure (M)


WITHDRAWALS

INJECTIONS


12/147


s The relationship between injections andwithdrawals

( the links between them

( planned injections may not equal plannedwithdrawals





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s Equilibrium in the circular flow




s Equilibrium in the circular flow


14/147

Factor

payments

Factor

payments

Consumption of

domestically

produced goods

and services (Cd)

Consumption of

domestically

produced goods

and services (Cd)


Government

expenditure (G)

Government

expenditure (G)

Export

expenditure (X)

Export

expenditure (X)

BANKS, etc

Net

saving (S)

Net

saving (S)

GOV.

Nettaxes (T)

Nettaxes (T)

ABROAD

Import

expenditure (M)

Import

expenditure (M)


WITHDRAWALS

INJECTIONS


15/147





s

Equilibrium in the circular flows The circular flow and the four

macroeconomic objectives




s

Equilibrium in the circular flows The circular flow and the four

macroeconomic objectives


16/147

Factor

payments

Factor

payments

Consumption of

domestically

produced goods

and services (Cd)

Consumption of

domestically

produced goods

and services (Cd)


Government

expenditure (G)

Government

expenditure (G)

Export

expenditure (X)

Export

expenditure (X)

BANKS, etc

Net

saving (S)

Net

saving (S)

GOV.

Nettaxes (T)

Nettaxes (T)

ABROAD

Import

expenditure (M)

Import

expenditure (M)


WITHDRAWALS

INJECTIONS


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Measuring national incomeMeasuring national income

s GDP: the measure of national incomes Methods of measuring GDP

( the product approach

(

the income approach( the expenditure approach



(



18/147

The circular flow of national income and expenditureThe circular flow of national income and expenditure


19/147

The circular flow of national income and expenditureThe circular flow of national income and expenditure

(1) Production(1) Production

(2) Incomes(2) Incomes (3) Expenditure(3) Expenditure


20/147




(


s The product approach



(


s The product approach


21/147




(


s The product approach( measuring GVA



(




22/147

UK GVA ( d t b d ) 2001UK GVA ( d t b d ) 2001


23/147

Agriculture, forestry and fishing 8 241 m

Mining, energy and water supply 41 378 m

Manufacturing

153 132 m

Construction 47 327 m

Wholesale and retail trade; repairs 106 766 m

Hotels and restaurants 29 359m

Transport and communication 70 252 m

Banking, finance, insurance, etc. 6 667 m

Letting of property 209 839 m

Public administration and defence 42 096 m

Education, health and social work 114 069 m

Other services 45 101 m

Total GVA 874 227 m

UK GVA (product-based measure): 2001UK GVA (product-based measure): 2001

UK GVA ( d t b d ) 2001UK GVA ( d t b d ) 2001


24/147

0.9

4.7

17.5

5.4

12.2

3.4

8.0

0.8

24.0

4.8

13.0

5.2

100.0

Agriculture, forestry and fishing 8 241 m

Mining, energy and water supply 41 378 m

Manufacturing

153 132 m

Construction 47 327 m

Wholesale and retail trade; repairs 106 766 m

Hotels and restaurants 29 359m

Transport and communication 70 252 m

Banking, finance, insurance, etc. 6 667 m

Letting of property 209 839 m

Public administration and defence 42 096 m

Education, health and social work 114 069 m

Other services 45 101 m

Total GVA 874 227 m

Percen

tageofGV

A

UK GVA (product-based measure): 2001UK GVA (product-based measure): 2001


25/147

UK GVA b t f i 2001UK GVA b t f i 2001


26/147

Compensation of employees

(wages and salaries)556 371 m

Operating surplus(gross profit, rent and interest of firms

government and other institutions)

238 625 m

Mixed incomes

60 073 m

Tax less subsidies on production

(other than those on products) plus

statistical discrepancy 19 158m

UK GVA by category of income: 2001UK GVA by category of income: 2001

UK GVA b t f i 2001UK GVA b categor of income 2001


27/147





238 625 m

Mixed incomes

60 073 m




Total GVA 874 227m


UK GVA b t f i 2001UK GVA by category of income: 2001


28/147

63.6

27.3

6.9

2.2

100.0





238 625 m

Mixed incomes

60 073 m




Total GVA 874 227m


Perc

entageofGVA


29/147


30/147

GVA (gross value added at basic prices) 874 227m

UK GDP (product-based measure): 2001UK GDP (product-based measure): 2001


31/147


plus Taxes on products 120 499m



32/147



less Subsidies on products 6 712m



33/147



less Subsidies on products 6 712m

GDP (at market prices) 988 014m



34/147




(



s The income approach

s The expenditure approach



(



s The income approach

s The expenditure approach

UK GDP b t f dit GNY d NNY 2001UK GDP b t f dit GNY d NNY 2001


35/147

million

Consumption expenditure of households and NPISH(C) 655 265

Government final consumption (G) 190 663

Gross capital formation (I) 164 048

Exports of goods and services (X) 268 451

less Imports of goods and services (M)290 912

Statistical discrepancy 499

Gross domestic product (GDP) (at market prices) 988 014

UK GDP by category of expenditure, GNY and NNY: 2001UK GDP by category of expenditure, GNY and NNY: 2001


36/147




( the income approach

( the expenditure approach


s The income approach( from GVA to GDP

s From GDP to net national income (NNY)



( the income approach

( the expenditure approach


s The income approach( from GVA to GDP

s From GDP to net national income (NNY)


37/147

UK GDP b categor of e pendit re GNY and NNY 2001UK GDP by category of expenditure GNY and NNY: 2001


38/147

million

Consumption expenditure of households and NPISH(C) 655 265

Government final consumption (G) 190 663

Gross capital formation (I) 164 048

Exports of goods and services (X) 268 451

less Imports of goods and services (M)290 912

Statistical discrepancy 499

Gross domestic product (GDP) (at market prices) 988 014

plus Net income from abroad 5 756

Gross national income (GNY) 993 770

less Capital consumption (depreciation) 111 275

Net national income (NNY) 882 495

UK GDP by category of expenditure, GNY and NNY: 2001UK GDP by category of expenditure, GNY and NNY: 2001


39/147


40/147

Human Development Index (HDI) for selected countries (2000)Human Development Index (HDI) for selected countries (2000)


41/147

Human Development Index (HDI) for selected countries (2000)p ( ) ( )



42/147

u a e e op e t de ( ) o se ected cou t es ( 000)p ( ) ( )


43/147



44/147

p ( ) ( )p ( ) ( )



45/147

p ( ) ( )p ( ) ( )



46/147

p ( ) ( )p ( ) ( )



47/147

p ( ) ( )( ) ( )



48/147

p ( ) ( )


49/147

Growth and the Business CycleGrowth and the Business Cycle

s Growth in actual and potential growth

s Economic growth and the business cycle

( fluctuations in actual growth




The business cycleThe business cycle


50/147

O

Nation a

loutput

Time

Potential output


Actualoutput


51/147

s Growth in actual and potential output

s Economic growth and the businesscycle


( the phases of the business cycle








52/147

O

Nation a

loutput

Time

Potential output

Actualoutput

1

2

3

4

1

2

3

4

The business cycley


53/147





( trend growth





( trend growth




54/147

O

Nation a

loutput

Time

Potential output

Actualoutput

Trend

output

yy

G C


55/147




(

the phases of the business cycle( long-term output trend

( the business cycle in practice





( long-term output trend



G h d h B i C l


56/147




(



3 the irregularity of the cycle










57/147

G th d th B i C lG th d th B i C l


58/147




(




3 the length of the phases

3 the magnitude of the phases








3 the length of the phases

3 the magnitude of the phases


G th d th B i C lG th d th B i C l


59/147

s Causes of fluctuations in actual growth

( aggregate demand

(

aggregate demand relative to potentialoutput

s Actual growth in practice

( experience since 1970

s Causes of fluctuations in actual growth

( aggregate demand

(

aggregate demand relative to potentialoutput

s Actual growth in practice

( experience since 1970


Growth rates in selected industrial countriesGrowth rates in selected industrial countries


60/147

Annua

lgrowthrat e

(%

)

UK

-2

-1

0

1

2

3

4

5

6

7

8

9

10



61/147

Annua

lgrowthrat e

(%

)

UK

-2

-1

0

1

2

3

4

5

6

7

8

9

10



62/147

-2

-1

0

1

2

3

4

5

6

7

8

9

10

Annua

lgrowthrat e

(%

)

UK

France



63/147

-2

-1

0

1

2

3

4

5

6

7

8

9

10

Annua

lgrowthrat e

(%

)

UK

France



64/147

-2

-1

0

1

2

3

4

5

6

7

8

9

10

Annua

lgrowthrat e

(%

)

UK

France

Germany



65/147

-2

-1

0

1

2

3

4

5

6

7

8

9

10

Annua

lgrowthrat e

(%

)

UK

France

Germany



66/147

Annua

lgrowthrat e

(%

)

UK

France USA

Germany

-2

-1

0

1

2

3

4

5

6

7

8

9

10


67/147


68/147



69/147

Annua

lgrowthrat e

(%

)

UK

France USA

GermanyJapan

-2

-1

0

1

2

3

4

5

6

7

8

9

10



70/147

s

Causes of potential growth( increases in the quantity of factors

3 capital

3 labour

3 land and raw materials

3 the problem of diminishing returns

( increases in factor productivity

s

Policies to achieve growth( demand-side and supply-side policies

( market-orientated and interventionistpolicies

s

Causes of potential growth( increases in the quantity of factors

3 capital

3 labour

3 land and raw materials3 the problem of diminishing returns

( increases in factor productivity

s

Policies to achieve growth( demand-side and supply-side policies

( market-orientated and interventionistpolicies



71/147

Unemployment rates in selected industrial countriesUnemployment rates in selected industrial countries


72/147

UK

2

4

6

8

10

12

14

Unemployment(%o

fw

orkforce)



73/147

UK

2

4

6

8

10

12

14

Unemployment(%o

fw

orkforce)



74/147

2

4

6

8

10

12

14

Unemployment(%o

fw

orkforce)

UK

France



75/147

2

4

6

8

10

12

14

Unemployment(%o

fworkforce)

UK

France



76/147

2

4

6

8

10

12

14

Unemployment(%o

fworkforce)

UK

France

Germany



77/147

2

4

6

8

10

12

14

Unemployment(%o

fworkforce)

UK

France

Germany



78/147

2

4

6

8

10

12

14

Unemployment(%o

fworkforce)

UK

France USA

Germany



79/147

2

4

6

8

10

12

14

Unemployment(%o

fworkforce)

UK

France USA

Germany



80/147

2

4

6

8

10

12

14

Unemployment(%o

fworkforce)

UK

France USA

Germany Japan



81/147

2

4

6

8

10

12

14

Unemployment(%o

fworkforce)

UK

France USA

Germany Japan



82/147

UK

France USA

Germany Japan

OECD

2

4

6

8

10

12

14

Unemployment(%o

fworkforce)



83/147

UK

France USA

Germany Japan

OECD

2

4

6

8

10

12

14

Unemploy

ment(%o

fworkforce)

Standardised unemployment rates in differentsectors of the labour market (2002)



84/147

sectors of the labour market (2002)sectors of the labour market (2002)




85/147





86/147





87/147



88/147

Disequilibrium unemploymentDisequilibrium unemployment


89/147

QeO

Averag

e(real)wage

rate

No. of workers

ASL

ADL

We


90/147

Disequilibrium unemploymentDisequilibrium unemployment


91/147

O

Averag

e(real)wage

rate

No. of workers

ASL

ADL

We

W2

Q2 Q1

B A

UnemploymentUnemployment


92/147


s Unemployment and the labour market( the aggregate demand and supply of labour

( equilibrium in the model

( disequilibrium unemployment

( equilibrium unemployment

s Unemployment and the labour market( the aggregate demand and supply of labour

( equilibrium in the model

( disequilibrium unemployment

( equilibrium unemployment

Equilibrium unemploymentEquilibrium unemployment


93/147

O

Averag

e(real)wage

rate

No. of workers

ADL

We

ASL

e

Qe

Equilibrium unemploymentEquilibrium unemployment


94/147

Q2QeO

Averag

e(

real)wage

rate

No. of workers

ASL

ADL

We

N

e d

Equilibrium and disequilibrium unemploymentEquilibrium and disequilibrium unemployment


95/147

O

Averag

e(

real)wage

rate

No. of workers

ADL

We

e

Qe

ASL



96/147

O

Averag

e(

real)wage

rate

No. of workers

ASL

ADL

We

W2 b a

e

Disequilibriumunemployment



97/147

O

Averag

e(

real)wage

rate

No. of workers

ASL

ADL

We

W2 b a

e

N

c

Equilibriumunemployment

Disequilibriumunemployment



98/147

p yp y

s Disequilibrium unemployment

( real-wage (classical) unemployment

( demand-deficient (cyclical) unemployment

( unemployment arising from a growth in thelabour supply

s Disequilibrium unemployment

( real-wage (classical) unemployment

( demand-deficient (cyclical) unemployment

( unemployment arising from a growth in thelabour supply



99/147

p yp y

s Equilibrium unemployment

( frictional (search) unemployment

(

structural unemployment3 changing pattern of demand

3 technological unemployment

3 regional unemployment

( seasonal unemployment

s Equilibrium unemployment

( frictional (search) unemployment

(

structural unemployment3 changing pattern of demand

3 technological unemployment

3 regional unemployment

( seasonal unemployment

Aggregate Demand and SupplyAggregate Demand and Supply


100/147

gg g pp ygg g pp y

s

The aggregate demand curves

The aggregate demand curve

Aggregate demand and aggregate supplyAggregate demand and aggregate supply


101/147

O

Pricelevel

National output

AD



102/147

gg g pp ygg g pp y

s The aggregate demand curve

( Why aggregate demand curves slopedownwards





103/147

gg g pp ygg g pp y



3 import effect



3 import effect


104/147



105/147

gg g y



3 import effect

3 interest-rate effect



3 import effect




106/147

O

Pricelevel

National output

AD



107/147

s

The aggregate demand curve( Why aggregate demand curves slope

downwards

3 import effect


3 savings effect

s

The aggregate demand curve( Why aggregate demand curves slope

downwards

3 import effect


3 savings effect



108/147

O

Pricelevel

National output

AD



109/147



3

import effect3 interest-rate effect

3 savings effect

s The aggregate supply curve



3

import effect3 interest-rate effect

3 savings effect




110/147

O

Pricelevel

National output

AS

AD



111/147



3 import effect


3 savings effect


( Why aggregate supply curves generallyslope upwards



3 import effect


3 savings effect





112/147

O

Pricelevel

National output

AS

AD



113/147



3 import effect


3 savings effect



s Equilibrium



3 import effect


3 savings effect



s Equilibrium



114/147

O

Pricelevel

National output

AS

AD

Pe



115/147

O

Pricelevel

National output

AS

AD

Pe

P2ab



116/147

s The aggregate demand curve( Why aggregate demand curves slope

downwards3 import effect

3

interest-rate effect3 savings effect

s The aggregate supply curve( WhyAScurves generally slope upwards

s Equilibrium( Effect of a shift in theAD curve

s The aggregate demand curve( Why aggregate demand curves slope

downwards3 import effect

3

interest-rate effect3 savings effect

s The aggregate supply curve( WhyAScurves generally slope upwards

s Equilibrium( Effect of a shift in theAD curve

InflationInflation


117/147

s Defining inflation

s The costs of inflation

(

redistribution( uncertainty

( balance of payments

( resources used to cope with inflation

s Experience of inflation since 1965

s

Defining inflation

s The costs of inflation

(

redistribution( uncertainty

( balance of payments

( resources used to cope with inflation

s Experience of inflation since 1965

UK26

Inflation rates in selected industrial countriesInflation rates in selected industrial countries


118/147

0

2

4

6

8

10

12

14

16

18

20

22

24

Inflation(%i

ncreaseinretailp

rices)

UK26



119/147

0

2

4

6

8

10

12

14

16

18

20

22

24

Inflation(%i

ncreaseinretailp

rices)

24

26UK



120/147

0

2

4

6

8

10

12

14

16

18

20

22

24

Inflation(%i

ncreaseinretailp

rices)

EU 15

24

26UK



121/147

0

2

4

6

8

10

12

14

16

18

20

22

24

Inflation(%i

ncreaseinretailp

rices)

EU 15

24

26UK USA



122/147

0

2

4

6

8

10

12

14

16

18

20

22

24

Inflation(%i

ncreaseinretailp

rices)

EU 15

24

26UK USA



123/147

0

2

4

6

8

10

12

14

16

18

20

22

24

Inflation(%i

ncreaseinretailp

rices)

EU 15

24

26UK USA



124/147

0

2

4

6

8

10

12

14

16

18

20

22

24

Inflation(%i

ncreaseinretailp

rices)

EU 15 Japan

24

26UK USA



125/147

0

2

4

6

8

10

12

14

16

18

20

22

24

Inflation(%i

ncreaseinretailp

rices)

EU 15 Japan

UK USAOECD24

26Inflation rates in selected industrial countriesInflation rates in selected industrial countries


126/147

EU 15 JapanOECD

0

2

4

6

8

10

12

14

16

18

20

22

24

Inflation(%i

ncreaseinretailp

rices)

UK USAOECD24

26Inflation rates in selected industrial countriesInflation rates in selected industrial countries


127/147

EU 15 JapanOECD

0

2

4

6

8

10

12

14

16

18

20

22

24

Inflation(%i

ncreaseinretailp

rices)

InflationInflation


128/147

s Types of inflation( demand pull


Demand-pull inflationDemand-pull inflation


129/147

O

Pr

icelevel

National output

AS

AD1

P1

Q1


130/147


131/147

InflationInflation


132/147


( cost push


( cost push

InflationInflation


133/147


( cost push3wage push



InflationInflation


134/147



3 profit push



3profit push

InflationInflation


135/147



3 profit push3 import-price push



3profit push3 import-price push

Cost-push inflationCost-push inflation


136/147

O

Pricelevel

National output

AS1

AD

P1

Q1

AS



137/147

O

Pricelevel

National output

AS1

AD

P1

Q1

AS2

AS



138/147

O

Pricelevel

National output

AS1

AD

P1

Q1

AS2

P2

Q2

InflationInflation


139/147

s Types of inflation

( demand pull

( cost push

3

wage push3 profit push

3 import-price push

(

the interaction of demand-pull and cost-push inflation

s Types of inflation

( demand pull

( cost push

3wage push

3profit push

3 import-price push

(

the interaction of demand-pull and cost-push inflation

The interaction of demand-pull and cost-push inflationThe interaction of demand-pull and cost-push inflation


140/147

O

Pricelevel

National output

AS1

AD1

P1

AS



141/147

O

Pricelevel

National output

AS1

AD1

P1

AS2

AD2

P2

AS3AS



142/147

O

Pricelevel

National output

AS1

AD1

P1

AD2

P2

3

AD3

P3

AS2

InflationInflation


143/147



3

profit push3 import-price push

( structural (demand shift)



3



InflationInflation


144/147



3



( expectations and inflation



3




InflationInflation


145/147



3




s Policies to tackle inflation



3




s Policies to tackle inflation

InflationInflation


146/147



3




s Policies to tackle inflation( demand-side policies



3




s Policies to tackle inflation( demand-side policies


147/147

ad as macro

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