Macroeconomics,Macroeconomics PPT,Macroeconomics university of Palestine Dr. Moran Ra jab
Text of Macroeconomics CH2
1. Chapter 2Chapter 2 Gross Domestic IncomeGross Domestic
Income (GDI) and(GDI) and Gross Domestic ProductGross Domestic
Product (GDP(GDP((
2. The four-sector circular flow model describesThe four-sector
circular flow model describes the operation of the economy and the
linkagesthe operation of the economy and the linkages between the
main sectors in the economy.between the main sectors in the
economy. The four -sector model is based on dividing theThe four
-sector model is based on dividing the economy into four sectors as
follow;economy into four sectors as follow; 1. Individuals1.
Individuals (house holds)(house holds) CC 2. Businesses2.
Businesses II 3. Government3. Government GG 4. International
Trade4. International Trade ( X-M )( X-M )
3. The circular flow of incomeThe circular flow of income:: The
circular flow of income: implies that every dollar spent by someone
for purchasing is considered an incomeincome for someone else; This
income is also representing the value of the good or service.
Therefore, a dollar of expenditurea dollar of expenditure = a
dollar of income = value of the good or service = production
value.
4. Illustration of the circular flowIllustration of the
circular flow of incomeof income:: To illustrate the circular flow
of income, we assume initially that we have a simple economy that
consists of two sectorstwo sectors; Business sector and the
individuals sector assuming that all the individuals sector income
is spent on consumptions goods and services the figure below
illustrates this concept where there is a cash flow between the
individuals
5. Sum of all finalSum of all final goods and servicesgoods and
services = GDP= GDP BusinessesBusinesses II Production
ElementProduction Element returns = nationalreturns = national
incomeincome HouseholdHousehold IndividualsIndividuals CC Wages +
salaries+ capital return+ rentsWages + salaries+ capital return+
rents Final goods and services 2 4 3 Circular flow for income in
two sectors economyCircular flow for income in two sectors
economy
6. Explanation of sectors processesExplanation of sectors
processes:: 1. The individuals sector supplies the business sector
with all production factors such as labor , capital and natural
resources 2. The business sector uses the production factors in the
production process, so they produce goods and services which the
individuals sector use for consumption.
7. 3. For business sector to receive the production elements
services from the individual sector, the individual sector receives
returns, these returns are represented in wages, salaraies, return
of capital, retrun on investment, land rental (natural resources).
* All of these retrurns or incomes are called local income.local
income.
8. 4. The individuals sector buys its needs and services that
the business sector produce and pays in reurn for these needs an
income (local income), the sum of these final goods and services is
represented by the Gross Domestic Product GDP and this is
illustrated in the previous figure and also illustrates the total
expenditure that consists of the consumer spending for the
individual sector in this simple economy.
9. Therefore, we have a cash flow from once sector that is met
with a cash flow with the same value from another sector. GDP from
goods and services that were produced by the business sector
through the production elements that had income, which means the
production has generated income, these incomes have been spent on
the GDP from its different goods and services as illustrated
below.
10. To be more realistic, we have to take into account the
other sectors of the macroeconomics such as the government sector
and the external world (imports & exports). In addition to
business sectors and individual sectors. This sictualr flow for
income is illustrated by the new figure below. In this figure we
notice, that the individual sector does not spend its income on
consumption.
11. The channels of Individual SectorThe channels of Individual
Sector incomeincome A- Goods and services consumption which means
the Private Consumption Expenditure and its value goes directly to
the business sector (arrow 1)
12. B-B- SavingsSavings:: it remaining unspent part of the
income for the purpose of spending in the future or may be
invested, therefore, this savings would find its way to the
financial market (banks, saving institutions, etc.) whose task to
gather all the savings and make it available for investors in the
form of loans, that is used to purchase investment goods, these
goods represent part of 2 as illustrated ( arrow 1) GDP value goes
to the business sectors.
13. C. Net Taxes:C. Net Taxes: is the deductable part of the
income that goes directly to government to finance its expenditure
on goods and services purchased from the business sectors as in
(arrow 3). Since the government pays salaraies and payments for
seniors and retired people (social security payments or pension)
those represent part of the family sector. * To net taxes is
calculated by deducting the social security payments from the taxes
paid to government
14. D- Imports:D- Imports: the individual sector finally
imports the goods and services from outside because they are
available nationally and in return, the business sector exports
goods and services that are produced nationally
15. Cash flow for a 4 sectors economy (individuals,Cash flow
for a 4 sectors economy (individuals, Business, governmental,
internationalBusiness, governmental, international(( National
income (wages, salaries,National income (wages, salaries, returns,
capital, rentsreturns, capital, rents(( Household SectorHousehold
Sector CC Business SectorBusiness Sector II FinancialFinancial
MarketMarket Government Sector GGovernment Sector G International
Trade X - MInternational Trade X - M Private Consumptive Spending
(1Private Consumptive Spending (1(( SavingSavingInvestment
(2Investment (2(( Net taxesNet taxes Government
consumptiveGovernment consumptive spending (3spending (3(( Imports
(3Imports (3((Exports (4Exports (4((
16. We notice from the above circular cash flow that the
domestic products main spending was by the domestic income which
the individual sectors gets Gross Doemstic Income (GDI) = Gross
Domestic Product (GDP) Thereofer, we can deduce the meaning and
concept of the following GDP, GDI and Total Expecditure.
17. Gross Domestic Product (GDP(: is the sum of all final goods
and services that are produced nationally in specific period of
time usually (one year)
18. Gross Doemstic Income (GDI(: is the sum of production
elements that contributed in the production process (contributed in
the GDP) in specific period of time usually (one year). Total
Expenditure:Total Expenditure: is the total demand and is
represented by the private consumption expenditure, investment
consumption, government expenditure, net difference between
(exports-imports) in specific period of time usually (one
year).
19. Gross Domestic Product (GDPGross Domestic Product (GDP(( Is
measured in three different approaches 1. Product 2. Income 3.
Expenditure
20. Product ApproachProduct Approach:: This is divided into two
methods:
21. A) The final value approach: the country sums up all what
has been produced from a final goods and services in a monetary
value in a specific period of time usually one year and the sum is
the domestic product. Primary and medium goods and services are not
included in this GDP Calculation, this approach does just account
for the final goods and services. The final good is the one that is
purchased for a potential use not for sale or for waste.
22. B) Value added method: Value added =Value added =
Production value production needs at every stage of the production
stages
23. ExampleExample Product Production Stages Additional Value
Wheat 70 70 Flour 130 60 Bread 200 70 We notice that the value 400
200
24. We see that the bread value as a final good = the sum of
the added value = 200. However, if we calculate the sales value in
the three stages = 400, that would be twice as much as the bread
cost and this is a misleading value that leads to a double standard
in the Gross Demostic Product. Therefore, the GDP can be calculated
as follow: The final value of the good estimated by the market
price May also be calculated the sum of the added value to the good
(70+60+70 = 200) and the two values are the same
25. 2-Income approach: This approach sums the following four
factors: a. Salaries and wages: for all employed in the state,
whether in the private or public sector b. Profit and interests:
such as companies profits and bank interests c. Rentals: includes
all rentals in the state d. Small business incomes: such as
warehouses, supermarkets and restaurants
26. Net National Income =Net National Income = wages and
salaries + profits and interests + rents + small businesses owner
income Gross Domestic Product with Market Value: Net national
Income + indirect taxes + amortization of capital subsidies on
production
27. 33..Spending MethodSpending Method:: Using this method, we
add 4 types of spending: 1- Private consumption spending ( C ) 2-
Investment Spending ( I ) and that includes two elementsand that
includes two elements Capital goods such as machines and buildings
Change in goods inventory such as primary, medium and final goods *
When somebody buys stock, this is considered an investment from his
perspective, but that is not considered an investment from the
societys perspective because it is a process of ownership
change.
28. 3. Government Spending: ( G ) includes all government needs
of goods, furniture and different materials for hospitals , schools
, universities and any requirements for society.
29. 4. External world Sector ( X-M ) This sector consists of
imports and exports, and this sector equal export import. GDP (by
this method)= Private consumption Spending (C)+ Investment Spending
(I ) government spending (G) + Net Outside spending (X-M )
30. Gross domestic Product ( GDP ) & Gross National Product
( GNP ) Gross Domestic Product (GNP) = gross national product + net
outside production elements returns. Net outside production
elements returns = is the difference between what comes in the
state (+) and what goes out of the state (-) Net outside production
elements returns = gross domestic product - gross national
product.
31. Example: If all income from outside to society is = 800
Million, and all the income that goes out the society is = 1000,
and the ( GDP )= 6500 Million, now calculate the GNP. Solution: GNP
= GDP - Net outside production elements returns Net outside
production elements returns = 1000-800 = - 200 Gross national
product (GNP) = 6500-200 = 6300 Million
32. Other measures for income and product: Important
rules:Important rules: 1. Gross national product ( GNP) = net
national product + capital amortization 2. Net national product (
NNP ) = Gross national product capital amortization 3. Personal
income ( PI ) = net national income retirement financial payments
taxes on profits indistributed profits + social security payments
4. Disposable personal income ( DPI ) = personal income direct
taxes on income 5. Disposable personal income ( DPI ) = consumption
+ saving
33. 6. Consumption ( C ) = Disposable personal income saving 7.
Saving = disposable personal income consumption 8. Disposable
personal income = personal income personal taxes (direct) 9.
Personal income = disposable income + direct taxes
34. 10. Gross domestic product (GDP) = net Domestic product +
capital amortization 11. Net domestic product ( NDP )= gross
domestic product capital amortization 12. Capital amortization =
gross domestic product net gross product 13. Gross investment = net
investment + capital amortization 14. Net Investment = gross
investment capital amortization 15. Capital amortization = gross
investment net investment
35. Example 1: assume that you have the following dataassume
that you have the following data:: Retirement paymentsRetirement
payments 40 Rentals 24 Capital amortization 180 Indirect taxes 163
Family consumption 1080 Gross investment 240 Taxes on profits 65
Wages and salaries 1028 Undistributed profits 18 Government
spending 365 Exports 17 Social security payments 20 Imports 117
Direct taxes 40 Distributed profits 117 Small business owners
income 97
36. Calculate the following: 1. Gross national product using
the income and spending methods 2. Net national product 3. Personal
income 4. Saving
37. Solution: a. Gross national product using the spending
method = C + I + G + (X M ) 1080 + 240+ 365 + ( 17- 10) = 1692
Million b. Gross national product (using the income method) = net
national income + capital amortization + indirect taxes ( net
national income = wages and salaries + distributed profits +
rentals + small business owners income ) = 1028 + 117 + 65 + 18 +
24 +97 = 1692 Million
38. c. Net national product = gross national product capital
amortization = 1692-180 = 1512 Million d. Personal income = net
national income retirement payments undistributed profits taxes on
profits + social security payments = 20+65-18-40-1349 = 1246
Million e. To get the saving, we should calculate the disposable
income Disposable income = personal income direct taxes = 1246-40=
1206 Million (M) Savings = disposable income family consumtion
sector = 1206-1080 = 126 M
39. Example 2 : assume that you have the following dataassume
that you have the following data:: Distributed profits 13 Gross
Investment 46 Indirect taxes 22 Exports 9 Direct taxes 38
Disposable income 190 Imports 12 Private savings 10 Government
consumption 84 Retirement payments 23 Capital amortization 52
40. Calculate the followingCalculate the following:: 1- Gross
national product (DNP) 2- net national product (NNP) 3- net
national income (NNI) 4- personal income ( PI )
41. SolutionSolution:: Gross national product ( GNP ) = C+ I +
G + ( X-M ) We need to calculate the family consumption which is C
= disposable income savings = 190-10 = 180 M Gross National Product
(GNP) =180 + 46 + 84 ( - 3 ) = 307 M Net National product = GNP
capital Amortization = 307-52=255 NNI = NNP indirect taxes = 255-22
= 233 Personal income ( PI ) = disposable income + direct taxes =
190+38=288
42. Monetary National Product & Real National Product
Monetary National ProductMonetary National Product is the sum of
all final goods and services that have been produced by current
prices
43. Real National ProductReal National Product Real National
ProductReal National Product is the sum of all final goods and
services that have been produced by fixed prices. The national
product is the sum of all values of final goods and services that
is produced in a certain period of time. However, the national
product inflates from one year to another because the prices of
goods and services increase from one year to another.
44. Example: let us assume that the national product for 2000
was 1000 Million and in 2001 was 1300 Million dolar, even though
the final process for the final goods was fixed in these two years,
the national product has increased from 1000 to 1300 Million. The
reason was increasing the prices in 2000 therefore, the national
product value was inflated and thus the two years cant be compared.
To overcome this problem, we have to exclude the effect of change
in prices in these two years using the price index numbers.
45. Price Index Numbers: There are many types of price index
numbers such as price index number for consumers, wholesale prices,
and retail process and so on. Simple Index Number: assume that we
have three commodities whi are materials. Flour, and pencils
46. Table 2-2 Commodity Primary Year 100% Price in 2000
Comparison Price in 2005 Materials (Meter) 2 3 Pencils 1 3 Flour
(Kgm) 1 2
47. To find the simple index number,To find the simple index
number, we do two simple thingswe do two simple things:: 1. First
Step1. First Step we get the price ratio in 2005 (compared year) to
year (2000) (primary Year) = Materials Priec in 2005/Materials
Price in 2000= 3/2, 3/1, 2/1 = 1.5, 3, .5 Materials = 1.5 , pencils
= 3, flour = 2
48. 2. Second step we get the average for the three ratios are
as follows: The simple index number = [2+3+1.5] / (3) *100 = 216%
Since the index number for the primary year is 100%, then the
increase percentage in the compared year is 216-100 = 116%. If the
result was less than 100 as 80 for example, the price would
decrease more in 2005 relative to 2000 by 20%.
49. The weighted index numberThe weighted index number One of
the disadvantages of the simple index number that it equalize the
relative significance of different goods, even though of its
various significance for individuals. The family for example needs
a daily amount of bed but may need the same for pencils. For
example, if we give the materials a weight of 15%, pencils 5%, and
flour 80%, in order to have a total weight of 100%.
50. Table 2-3Table 2-3 Commodities (1) Price in 2000 in dollars
(2) Price in 2005 in dollars (3) Weights (4) Primary X Weights (5)
Comparison X weights (6) Materials (m)Materials (m) 2 3 15 30 45
PencilsPencils (Dozen)(Dozen) 1 3 5 5 15 Wheat (kgm)Wheat (kgm) 1 2
80 80 160 100 115 220
51. StepsSteps:: 1. Allocate a weight for every commodity in
the family budget, column (4) 2. Multiply the commodity price for
the primary year and the comparison year in its weight and we get
column (5), and column (6) 3. Find the sum of column 5 & the
sum of column 6
52. 4. The sum of column 6 is divided by the sum of column 5
and multiplied by a 100 and we get the weighted index number for
prices. The weighted price index = (220/115) x100 = 191% The
percent increase in prices = 191-100 = 91%, we see that this result
is smaller than that which we got in the simple index number in
116% and that because an appropriate weight has been given to each
commodity.
53. The Index Number for Prices using Lasbeer Method Table
(2-4( Commodity (1) Primary year, price in 2000 in dollars (2) P
Purchased quantity (3) Q The compari son year Price x quantity (4)
PQ Price in 200 5 (5) P Purchased quantit y (6) Q Price x Quant ity
2005 PQ Materials (m) 2 20 40 3 20 60 Pencils (dozen) 1 10 10 3 10
30 Wheat (kgm) 1 50 50 2 50 100 Sum 4100 4190
54. The index number for prices using Lasbeer method =
(190/100)x100 = 190% The percent increase in prices in the
comparison method in 1406 against the primary year is
2000=190-100=90% Note: when choosing the primary year, it has to be
a normal year where increase or decrease in prices should not be
very high so that the value for the index number is not affected.
After figuring out the index number, we find the real national
product. The real domestic product = (the national monetary
product/ price index number )x100 The real domestic product =
(38000/190)x100 = 20000 Million
55. Example 1 If you have the national monetary product and the
index numbers, calculate the real national product: YearYear The
domestic monetaryThe domestic monetary productproduct Idex number
forIdex number for pricesprices 2000 4000 100 2001 6000 120 2003
10000 200 2005 12000 220
56. The domestic real product = (the domestic monetary product
/ index number for prices for the same year ) x 100 = 4000 Million
The domestic real product for 2000 = (4000/100)x100 = 4000 Million
The domestic real product for 2001 = (6000/120)x100 = 5000 Million
The domestic real product for 2003 = (10000/200)x100 = 5000 Million
The domestic real product for 2005 = (12000/220)x100 = 5454.5
Million The domestic monetary product: The domestic monetary
product = (the real domestic product x the index number )/ 100
57. Example 2 If the real domestic product for a certain year
is 5000, and the index number is 120, calculate the monetary
product? The domestic monetary product = (120x5000)/100 = 6000
Million
58. Example 3: if the domestic monetary product is 6000 and the
real product for the same year is 5000 , ohw much is the index
number for prices for the same year? The index number = (6000/5000)
x100 = 120
59. Important NotesImportant Notes:: 1. If the index number for
the comparison year is greater than the index number for the
primary year, then the real product is smaller than the monetary
product. 2. If the index number for the comparison year is smaller
than the index number for the primary year, then the real product
is greater than the monetary product. 3. If the index number for
the comparison year =100, then the real product and the monetary
product are going to be equal.
60. Domestic product reducerDomestic product reducer This is
different from the other index numbers in that it takes into
consideration the capital commodities investment in addition to the
consumption goods and services. The real domestic product using the
lowering method = (monetary doemstic product / doemstic product
reducer) x 100
61. Example 4Example 4 If the monetary doemstic product (MDP)
for a certain country in 1980 was $20,000 billion and the domestic
product reducer (DPR) for the same year was 200. Calculate the real
domestic product (RDP) for this country in that year? RDP =
(20000/200)x100 = $10000 billion DPR = (MDP/RDP)x100 =
(20000/10000)x100 = 200% MDP = (RDPxDPR)/100 = $20000 billion
62. Significance of calculating theSignificance of calculating
the Domestic ProductDomestic Product Disadvantages of calculating
the domestic products are as follow: 1. Many data are required to
get to the sum of all the final goods and services produced by the
state which lead to possible errors 2. In most cases, it is hard to
get the same value for domestic product, if we follow the added
value and the final goods values because of measurement errors and
inaccuracy
63. 3. A lot of services are not accounted for when calculating
the domestic product such as the services offered by the house wife
in her household or the doctor for his family 4. Many factors that
gets in the calculation of the domestic product are estimated such
as the consumption of the farmer for some of his products or
capital consumption and these estimates are not accurate.
64. Advantages of knowing the significance of the Domestic
Product: 1. Understanding these calculations summarize the
economical activities that the state has implemented in one year 2.
Understanding these calculations calrify the returns of the
production components in one year. 3. Calculations of the doemstic
product are considered the most important tools for analysis for
designing economical plans, and that help forecast the future
properly
65. Cautions when using the domesticCautions when using the
domestic products values are as followsproducts values are as
follows:: 1. Avoid using these values as a indicator for economical
welfare in the state 2. Caution should be exercised when comparing
the monetary doemestic product from one year to another in
realizing the whether the state is back warding or forwarding. 3.
Caution should be exercised when comparing the domestic product
among different countries so that the purchasing power for the
currency in every country has to be taken into consideration.