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, 1950-2000
30
25
% p.a.
20
15
10
5
0
2000
1990
1980
1970
1960
1950
Source: Economic Trends Annual Supplement, Labour Market Trends
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©The McGraw-Hill Companies, 2002
Inflation in UK, USA and Germany
1960 - 2001
16
14
12
10
UK
USA
Germany
Annual % 8
6
4
2
0
1960-73
1973-81
1981-90
4
1990-01
©The McGraw-Hill Companies, 2002
Unemployment in the UK
1950-2000
14
12
% p.a.
10
8
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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©The McGraw-Hill Companies, 2002
Unemployment
in UK, USA and Germany
10
% p.a.
8
6
4
2
0
1960-73
1973-81
UK
USA
1981-90
1990-01
Germany
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Economic growth
in UK, USA and Germany
5
% p.a.
4
3
2
1
0
1960-73
1973-81
UK
USA
1981-90
1990-01
Germany
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The circular flow of income,
expenditure and output
I
C
S
C+I
Households
Firms
Y
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Government in the circular flow
I
C+I+G
C
S
G
Households
C + I + G - Te
Te
Government
Firms
B - Td
Y + B - Td
Y
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©The McGraw-Hill Companies, 2002
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
GNP
(and
GNI)
at
market
prices
Indirect
taxes
I
NX
C
GDP
NNP
at
market at basic National
prices prices income
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Profits,
rents
Selfemployment
Wages
and
salaries
©The McGraw-Hill Companies, 2002
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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