01 Grenoble Macroeconomics Session 1 Introduction

8/12/2019 01 Grenoble Macroeconomics Session 1 Introduction

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Macroeconomics

Session 1


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Goals of this session

What is macro and why is it important forbusiness

Measuring macro variables-output,inflation, unemployment plus stylised facts

The circular flow of income


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What is macroeconomics?

Macroeconomics is the study of economic aggregates Total output of goods and services produced The average rate of price inflation The overall rate of employment and unemployment

Key questions include

What determines the rate of growth of total output? What are the causes of unemployment and its persistence? Why has it

risen in the recent period? What causes inflation and does inflation matter? How can government policy impact on growth, unemployment and

inflation?

Major macroeconomic events The Great Depression of the 1930s The stagnation of the Japanese economy since the 1990s The collapse of growth in South East Asia in the late 1990s The current financial crisis


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Key government macroeconomicobjectives

High and stable rates of economic growthover the long term

Low and stable inflation

Low unemployment

Balance of payments equilibrium


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Why is macro important forbusiness?

Macroeconomic developments (growth, inflation, exchange rates,government fiscal and monetary policy) are important influences onbusiness performance: Exchange rates impact on competitiveness in export markets and

competition from imports with implications for sales and profitability Inflation of input prices (labour, materials, energy) impacts on company

costs Government monetary policy determines bank borrowing costsand availability of finance for expansion and meeting cash flow needs

Macroeconomic developments important in business planning andstrategy development. Discounted cash flow calculations requiretaking a view on future rates of inflation, interest rates and marketdemand.

Leading macroeconomic indicators such as the purchasingmanagers indicator, forewarn senior management of possibleturning points in the overall performance of the economy and theneed for potential strategy adjustment to prepare for recovery orslowdown


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Measuring national output

The measure of national output is called the Gross Domestic Product, GDP. GDP is the value of all finalgoods and services produced in an economy in a given time period.

It excludes intermediate purchases of goods and services e.g. the output of cars included but not the steelthat goes into the production of a car

GDP is the sum of value addedin the economy during a given time period i.e. it is the value ofproduction minus the value of intermediate goods used in production

GDP can also be looked at from the incomerather than production side i.e. some of the valueadded goes to pay workers (labour income) and some of the value added goes to the firm (profit

income). GDP can also be looked at from the expenditure side as the sum of private consumption (C),

Investment (I), government expenditure excl. transfers (G) and net exports (XM)

Nominal and real GDP: Nominal GDP is GDP in current s or $s etc Real GDP is GDP is adjusted for any inflation that occurs over a period The change in Real GDP (2000 to 2010)

= Nominal GDP(2010)Nominal GDP(2000) divided by the change in prices (GDP deflator) between 2000and 2010

Not all the output of goods and services produced in a country is included in GDP and asubstantial black or underground economy exists in many countries


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The growth of world output (% p.a.at constant prices)


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The growth of output in selectedadvanced economies (% p.a.)


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The growth of output in DevelopingAsian countries (% p.a. constant

prices)


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GDP in 2009 (mUS$)


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Constant 2006 Market Prices

LAB LAB LABCONCONCONHeath Thatcher,

Major

Blair, BrownWilsonChurchill, Eden,

MacMillan,Douglas-Home

Attlee

2.9%

2.5%

2.9%

LABWilson,

Callaghan2.1% 2.2%

2.1%

GDP

(m)


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Constant 2006 Market Prices

GDPGrowth(%

perannum)

Keynesian Policies Monetarist / Supply Side PoliciesManaged Exchange Rates Flexible Exchange Rates

Marshall Plan,

Korean War

First Oil

Crisis Second Oil

Crisis

ERM Crisis

Global Financial

Crisis


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Inflation

Inflation is a sustained rise in the generallevel of prices-the price level. Theinflation rateis the rate at which the price

level increases Different measures of inflation

The GDP deflator gives the average price ofGDP

The consumer price index or cost of living isthe average price of goods paid for by theconsumer


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Inflation (% p.a. price increases)


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UK Inflation

-5%

0%

5%

10%

15%

20%

25%

30%

1958 1968 1978 1988 1998 2008

Global Financial

CrisisClaimantCount(000s)

RPI Annual % Change

Fixed Exchange Rates

First Oil

Crisis

Second Oil

Crisis

MoneyTargets

Lawson Boom /

Financial Liberation

Inflation Targets


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Unemployment

The unemployment rate is the ratio of thenumber of people unemployed to the number ofpeople in the labour force U=U/L

The problem in measuring the rate is that ofdetermining who is unemployed. In most labour force surveys an unemployed person

defined as one who is out of work and who is activelysearching for work

Unemployment benefit claimants often used tocalculate the rate but many not eligible for benefits

In the UK persons on incapacity benefit (2.5m) notcounted


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Unemployment rates


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Claimant Count

ClaimantCount(000s)


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The circular flow of income

Model 1 An economy with transactionsbetween households and firms

HOUSEHOLDS FIRMS

Households provide labour andcapital which they supply to firms

Households receive income fromfirms in exchange for providinglabour and capital

Households spend their income ongoods and services provided by firms

Firms use labour and capital providedby households to provide goods andservices

Firms pay households wages,dividends and interest for the labourand capital they provide

Firms sell goods and services tohouseholds


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A representation of Model 1

HOUSEHOLDS

Spending on goods and services

FIRMS

Factor incomes

Goods and services

Services of productive

factors

Flow of real resourcesFlow of payments

Three ways of measuring aggregate economicactivity-value of goods and services produced,the value of spending on goods and services and

the income of factors of production


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Introducing saving and investment:Model 2

HOUSEHOLDS

Spending on goods and services= 5000

FIRMS

Factor incomes=7000

Goods and services

Services of productive

factors

Saving = 2000

Investment= 2000

Value of GDP = Value of household income =Y = Household consumption C + Household saving SY = C + S

Value of GDP = Value of Final Expenditure = Household consumer expenditure C + Firms expenditure Investment IY = C + I

therefore S = I


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Introducing a government sector:Model 3

HOUSEHOLDS GOVERNMENT FIRMS

S

C

I

G

Te

C+I+G

Y+B-Td

C+I+G-Te

B-Td Y

GDP (at market prices) = Y=C + I + GGDP (at factor cost) Y= C + I + G TePersonal disposable income Y

d= Y + B Td

Saving S = (Y+B-Td)C and therefore Y=S-B+Td + CTherefore S-B+Td+C=C+I+G-TeS+Td+Te=I+G+B i.e. injections =leakages


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Open economy: Model 4

GovernmentSpending

Firms Households

Exports

Imports

Government

Investment

Consumption

Abroad

Financialinstitutions

Intermediate

Goods/services

WagesRentsInterest

Profits Dividends

Firm savingHousehold saving

Tax

X

G

I

C

M

Y = C + I + G + XM or S + T + M = I + G +X


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National Income accounting

GNPat

marketprices

ConsumptionC

Net exportsX-M

InvestmentI

GovernmentG

Net property incomefrom abroad

GDPat

market

prices

Net property incomefrom abroad

NetNationalProduct

atmarketpricesNNP

Depreciation

NationalIncome

atfactorcost

Indirecttaxes

Wages

Income fromemployment

Profits

Rentalincome


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Questions

The following is information from the national income accounts for a hypothetical country:GDP (Y) = 6000

Personal disposable income Yd= 5,100Government budget deficit (G-T) = 200Consumption (C) = 3,800Trade deficit (X-M) =100

How large is saving (S) ?

How large is investment (I) ?How large is government spending (G) ?

You are considering whether and when to invest your savings in starting a new business. Howmight a knowledge of key macroeconomic variables be of value in reaching your decision?

GDP per capita is widely used as an indicator of national welfare and in making cross-countrycomparisons of the standard of living. What criticisms would you make of such measures?

A useful website http://en.wikipedia.org/wiki/Gross_domestic_product#Income_Approach Compute the share of expenditure components for the US Q2 2009 from the data on this site
http://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Gross_domestic_product

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01 Grenoble Macroeconomics Session 1 Introduction