Economics
TENTH EDITION
by David Begg, Gianluigi Vernasca, Stanley
Fischer & Rudiger Dornbusch
Chapter 15
Introduction to
macroeconomics
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Macroeconomics is ...
• the study of the economy as a system
• 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, 1960-2010
0
5
10 % 15
20
25
UK Inflation 1960-2010
1960 Economic
1970Trends Annual
1980 Supplement,
1990 Labour 2000
2010
Source:
Market Trends
Year
Source: ONS
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Unemployment in UK and USA
Unemployment 1960-2010
UK
USA
12
10
8
6
4
2
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2009-10
1991-08
1982-90
1974-81
1960-73
0
Government in the circular flow
I
C
S
Households
C+I+G
G
C + I + G - Te
Te
Government
Firms
B - Td
Y
Y + B - Td
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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
G
GNP
(& GNI)
at
market
prices
NYA
Depreciation
Indirect
taxes
I
NX
NYA: Net income
from abroad
rental
income
Profits
GDP
at
NNP
Selfmarket at basic
employment
National
prices prices
income
Wages
and
salaries
C
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UK national accounts 2008 (£bn,
current prices)
Income measure
Income measure
At market prices:
Income source
C by households
891
Employment
770
Profits and rents
Other
429
83
1282
C by government and non-profit
350
organizations
I by private firms and
government
245
GDP at basic prices
NX
–40
Indirect taxes
GDP at market prices
1446
GDP at market prices
Net property income from abroad
GNP (GNI) at market prices
164
1446
25
1471
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Source: www.statistics.gov.uk
What GNP does & doesn’t 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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GNP Deflator
• The GNP deflator is the ratio of nominal
GNP to real GNP, expressed as an index.
Nominal GNP (Current £bn)
GNP deflator (1995=100)
Real GNP (£bn 1995 prices)
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1960
25
8
316
1995
750
100
750
2008
1471
141
1043
GNP per capita: Growth, 1980–
2008 (% per annum)
Real GNP
Denmark
UK
Jordan
2.3
2.7
4.1
Source: World Bank
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Per capita
real GNP
2.2
2.3
0.1
Tax evasion
• The hidden economy is often linked to tax
evasion.
• Taxes are evaded by smugglers and drug
dealers but also by gardeners, plumbers and
everyone else doing things ‘for cash’.
• Since GNP data are based on tax statistics, the
‘hidden’ economy is unreported. This means
that official GNP statistics may substantially
understate the true value of GNP.
• Estimating the size of the hidden economy is
obviously difficult.
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Recent estimates by Schneider,
Buehn and Montenegro
•
•
•
•
•
•
•
•
United States
UK
China
Germany
Spain
India
Poland
Georgia
9.0%
13.2%
14.3%
16.7%
23.1%
25.6%
29.1%
72.5%
As a percentage "official" gross domestic product
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