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Macroeconomics The Income and Output of Nations

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Page 1: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

Macroeconomics The Income and Output of

Nations

Page 2: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

22

MACROECONOMICS

– Microeconomics

• Macroeconomics– International Trade– Development

Page 3: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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ECONOMIC AGENTS

Households

FIRMS

Government

Page 4: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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Circular Flow Between Firms and Households

(real resources)

Goods and services

FOP Input:

Households Firms

Household includes workers, managers, entrepreneurs etc

Page 5: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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Circular Flow Between Firms and Households

(corresponding flow of payments)

Spending ongoods and services

FOP incomes

Households Firms

Page 6: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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Circular Flow Between Firms and Households

Spending ongoods and services

Goods and services

Services of productive factors

Factor incomes

Households Firms

Page 7: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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Three measures of national output

• Expenditure– the sum of expenditures in the

economy

• Income– the sum of incomes all factor incomes

• Output– the sum of output (value added)

produced in the economy

• All three approaches are should give you the same final figure for national output

Page 8: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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Circular Flow Between Firms and Households

Spending ongoods and services

Goods and services

Services of productive factors

Factor incomes

Households Firms

Expenditure

Output

Income

3 differe

nt way o

f measu

ring th

e

economic

activit

y in th

e economy

Page 9: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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Measuring Output

• Total value added – is the economy’s net output after deducting

goods used during production– to avoid double counting– E.g. egg, milk, flour used for making

muffins. MUFFINS. Final Good.

• Gross domestic product (GDP) – measures the output produced by factors of

production located in the domestic economy over a period of time, usually a year.

Page 10: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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Leakages from the Circular Flow

• Leakages (in terms of flow of payment)

– money paid to the households but not returned to firm

– Or flow of payments that started from firms but did not return back to firms

– e.g. household savings, net taxes and imports

Page 11: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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Circular Flow Between Firms and Households

(corresponding flow of payments)

Spending ongoods and services

Factor incomes

Households Firms

Leakages

Page 12: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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Injections into the Circular Flow

• Injections (in terms of flow of payment)

– are revenue for firms not from sales to household

– e.g. investment by firms, government purchases and exports

Page 13: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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Circular Flow Between Firms and Households

(corresponding flow of payments)

Spending ongoods and services

Factor incomes

Households Firms

Injections

Page 14: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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The Circular Flow of Income with Government and Foreign Trade

• Government – spends money on goods & services (G)– finances welfare payments, i.e. transfer

payments (B) this spending is financed by taxes (T)

Foreign Sector:

• Export (X)– made at local economy but sold abroad

• Import (M)– made abroad and bought at local economy.

Page 15: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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The Circular Flow of Income in Symbols

• Domestic Output (GDP) is either– Consumed (C)– Invested (I) (INCREASE IN STOCK OF

CAPITAL)– Bought by the Government (G)– Bought by the foreigners, net exports (X-M)

• Factor Incomes are spent on– Consumption (C)– Saving (S)– Paying taxes net of benefits (T-B)

Page 16: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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The Circular Flow of Income in Symbols

GDP = C + I + G + (X – M)Factor Income = C + S + (T – B)

Since every things produced in the economy

generates equivalent factor income

Domestic Output (GDP) = Factor Incomes

Page 17: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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The Circular Flow of Income in Symbols

Domestic Output

C + I + G + (X – M) C + S + (T – B)=

Factor Incomes

C: Consumption I: Investment G: Government ExpenditureX-M: Net exports

C: Consumed S: Savings T-B: Taxes Net of Benefits

Page 18: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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The Circular Flow of Income in Symbols

Domestic Output

C + I + G + (X – M) C + S + (T – B)=

Factor Incomes

rearrange

I + G + X S + (T – B) + M=

Total Injections Total Leakages

Page 19: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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NATIONAL INCOME (GDP)

• Y= National Income• C = Consumption• I = Investment• G = Government Expenditure• (X-M) =Net Exports

GDP = C + I + G + (X – M)

Page 20: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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IF ALL THAT IS PRODUCED, IS CONSUMED, THEN Y = C.

• However all the revenue coming from national production is not used for consumption: ©– T– S– M

• Also the national production is not consumed by national local households. © Part of it goes to: Foreign countries, Government buys part of it and Some of the production is used for producing other goods: Investment. – X– G– I

Therefore…

I + G + X S + (T – B) + M=

Total Injections Total Leakages

Page 21: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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PRODUCTION AND GROWTH • GDP is a stock variable. Fixed in a

specific time. An absolute figure.

• Growth is a flow variable. Measures the change over time. Therefore measures a change over time. A rate or %.

Page 23: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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Flow or stock?

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Page 25: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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GDP, GNP, • Gross domestic product (GDP)

– measures the output produced by factors of production located in the domestic economy over a period of time, usually a year.

• Gross National Product (GNP)– total income of citizens wherever it is earned

= GDP + Net Property Income (NPI)

IF GDP > GNP the citizens of the local economy are producing less than the citizens from abroad. It means that citizens from abroad in the local economy plus loclas make the local economy GDP bigger than its Citizens abroad and in the local economy together.

Depreciation: wear and tear of capital stockGross: DOES NOT TAKE IN ACCOUNT DEPRECIATION. Only the increase in K

stock.

• Net National Income= GNP – Depreciation

Page 26: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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GDP, GNP, Depreciation

• Nominal Gross National Product– Measures national output at current prices= value of all goods at current prices

• Real Gross National Product– Measures output at base year prices

e.g. value of today's national output at 1995 prices

– Allows us eliminate the effect of price changes and see how real output evolves over time

Page 27: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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GDP, GNP, Depreciation

GNP Deflator for year t =Nominal GNP for year t

Real GNP for year t

Changes in GNP Deflator allows us to isolate the effect of increasing prices on Nominal GNP

Page 28: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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Prices increase but productivity does not increase: Inflation

• Inflation: A sustained increase in general price level of the economy over time.

• If prices index in base year t: 100

• And if changes to year t1: 105, the increase will be :_____.

Year

∆ Prices ∆Nominal GDP

∆ Real GDP

92 2% 7%

93 2.5% 7.5%

94 4% 7%

95 3% 7%

96 2.5% 6.5%

97 1% 6%

98 2% 6%

Page 29: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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EXAMPLE

Page 30: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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Purchasing Power Parity• Purchasing power parity (PPP)

conversion factor. The PPP conversion factor shows how much of a country's currency is needed in that country to buy what $1 would buy in the United States.

• By using the PPP conversion factor instead of the currency exchange rate, we can convert a country's GNP per capita calculated in national currency units into GNP per capita in U.S. dollars while taking into account the difference in domestic prices for the same goods.

• Thus PPP helps us compare GNPs of different countries more accurately. Because prices are usually lower in developing countries, their GNP per capita expressed in PPP dollars is higher than their GNP per capita expressed in U.S. dollars.

Page 31: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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The Big Mac Index• Big Mac Index

• Burgernomics is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries.

• Thus in the long run, the exchange rate between two countries should move towards the rate that equalizes the prices of an identical basket of goods and services in each country.

• Our "basket" is a McDonald's Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad.

• Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.

Page 32: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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TOTAL GDP enough?

• GDP 1: 10,000,000$• Population 1: 5, millions

– Gdp / capita: 2$

• GDP 2: 10,000,000$• Pop 2: 700,000

– Gdp/capita: 14.2$

• GDP 3: 50,000,000• Pop 3: 28 millions

– Gdp/capita: 1.78$

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GDP/capita in different countries

Page 35: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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GDP Composition

Page 36: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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GDP per capita

Page 37: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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GDP AND GDP/Capita WORLD

Page 38: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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POPULATION GROWTH RATE

Page 39: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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GROWTH, POPULATION AND GNP/CAPITA

Page 40: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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Income per capita

Page 41: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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GNP per capita growth rates

Page 42: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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REAL GDP PER CAPITA

Page 43: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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National Income and Firm Sales

Page 44: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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TOTAL GDP is ok, but not enough… GDP measures

production in an economy…HOWEVER:

• Does NOT take in account other variables like:– Does not separate K or C goods.– Underground economy is not taken in account– Externalities are not taken in account.– Self consumption activities or household

activities are not taken in account.– Other issues which reflect standard of living.

Education, Health, environment, security, freedom, discrimination, etc…

– Income distribution (inequality)

Page 45: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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Unequal distribution of Income

Page 46: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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THEREFORE: DEVELOPMENT INDEXES ARE NEEDED TO EXPLAIN WELL BEING IN AN

ECONOMY.

World dev

Page 47: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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Growth and Development

• Millennium Development Goals

Page 48: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

Growth and Development

Page 49: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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• Technology= increase in productivity of other factors.

WHY COUNTRIES GROW?

Page 50: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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Technology and Mg productivity of labour

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Economic Growth

• Growth: An increase in an economy's ability to produce goods and services which brings about a rise in standards of living.

• The increase over time in the capacity of an economy to produce goods and services and (ideally) to improve the well-being of its citizens.

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Development• Economic Development: The process

of improving the quality of human life through increasing per capita income, reducing poverty, and enhancing individual economic opportunities.

•Economic Development: is typically measured in terms of jobs and income, but it also includes improvements in human development, education, health, choice, and environmental sustainability

The power of one: hyperlink

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DEVELOPMENT

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HOWEVER: Difficulties to measure development

• Subjective Variables (culture and religion?)

• Difficult to measure• Not available statistics• Different indicators to compare

development between countries and Institutions. (U.N., WB, WTO, IMF, etc)

• LDC, MDC, etc…• Read pp 30, 31, 32 green book

Page 55: Macroeconomics The Income and Output of Nations. 1 MACROECONOMICS –Microeconomics Macroeconomics –International Trade –Development

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World Bank Income Classification:

• Income group: Economies are divided according to 2006 GNI per capita.

• The groups are: – low income: $905 or less;– lower middle income: $906 - $3,595; – upper middle income: $3,596 -

$11,115; and – high income: $11,116 or more.

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World: GNP per capita Countries Classifications

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U.N. HDI Classification

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High Human development

• 1-Iceland Norway Australia Canada Ireland Sweden Switzerland Japan Netherlands France Finland United States Spain Denmark Austria United Kingdom Belgium

• Luxembourg New Zealand Italy Hong Kong, China (SAR) Germany Israel Greece Singapore Korea, Rep. of Slovenia Cyprus Portugal Brunei Darussalam Barbados Czech Republic Kuwait Malta Qatar Hungary Poland Argentina

• United Arab Emirates Chile Bahrain Slovakia Lithuania Estonia Latvia Uruguay Croatia Costa Rica Bahamas Seychelles Cuba Mexico Bulgaria Saint Kitts Nevis

• Tonga Libyan Arab Jamahiriya Antigua and Barbuda Oman Trinidad and Tobago

• Romania Saudi Arabia Panama Malaysia Belarus Mauritius Bosnia Herzegovina

• Russian Federation Albania Macedonia, TFYR Brazil-70

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Medium Human Development

• Dominica Saint Lucia Kazakhstan Venezuela, Rep. Bov. Colombia Ukraine

• Samoa Thailand Dominican Republic Belize China Grenada Armenia

• Turkey Suriname Jordan Peru Lebanon Ecuador Philippines Tunisia

• Saint Vincent and the Grenadines Fiji Iran, Islamic Rep. of Paraguay

• Georgia Guyana Azerbaijan Sri Lanka Maldives Jamaica Cape Verde

• El Salvador Algeria Viet Nam Occupied Palestinian Territories Indonesia Syrian Arab Republic Turkmenistan Nicaragua Moldova Egypt Uzbekistan Mongolia Honduras Kyrgyzstan Bolivia Guatemala Gabon Vanuatu South Africa

• Tajikistan São Tomé and Principe Botswana Namibia Morocco Equatorial Guinea

• India Solomon Islands Lao, People's Dem. Rep. Cambodia Myanmar Bhutan Comoros Ghana Pakistan Mauritania Lesotho Congo Bangladesh Swaziland

• Nepal Madagascar Cameroon Papua New Guinea Haiti Sudan Kenya Djibouti

• Timor-Leste Zimbabwe Togo Yemen Uganda Gambia

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Development

Link to presentation 19mins

Examination: Dr microeconomicsMarch 6th.