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Session 1
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
Macroeconomic developments important in business planning and strategy development. Discounted cash flow calculations require taking a view on future rates of inflation, interest rates and market demand. Leading macroeconomic indicators such as the purchasing managers indicator, forewarn senior management of possible turning points in the overall performance of the economy and the need for potential strategy adjustment to prepare for recovery or slowdown
GDP is the sum of value added in the economy during a given time period i.e. it is the value of production minus the value of intermediate goods used in production GDP can also be looked at from the income rather than production side i.e. some of the value added 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 (X M) 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 2000 and 2010
Not all the output of goods and services produced in a country is included in GDP and a substantial black or underground economy exists in many countries
CON
Churchill, Eden, MacMillan, Douglas-Home 2.9%
LAB
Wilson 2.5%
CON LAB
Heath Wilson, 2.9% Callaghan
2.1%
CON
Thatcher, Major 2.2%
LAB
Blair, Brown 2.1%
GDP (m)
Inflation
Inflation is a sustained rise in the general level of prices-the price level. The inflation rate is the rate at which the price level increases Different measures of inflation
The GDP deflator gives the average price of GDP The consumer price index or cost of living is the average price of goods paid for by the consumer
UK Inflation
30% 25% 20% 15% 10% 5% 0% 1958 -5% 1968 1978 1988 1998 2008
RPI Annual % Change
First Oil Crisis
Unemployment
The unemployment rate is the ratio of the number of people unemployed to the number of people in the labour force
U=U/L
Unemployment rates
Claimant Count
FIRMS Firms use labour and capital provided by households to provide goods and services
Firms pay households wages, dividends and interest for the labour and capital they provide Firms sell goods and services to households
A representation of Model 1
Spending on goods and services Goods and services
HOUSEHOLDS
FIRMS
Investment = 2000
HOUSEHOLDS
FIRMS
C+I+G-Te
FIRMS
B-Td
Y+B-Td
GDP (at market prices) = Y=C + I + G GDP (at factor cost) Y= C + I + G Te Personal disposable income Yd= Y + B Td Saving S = (Y+B-Td) C and therefore Y=S-B+Td + C Therefore S-B+Td+C=C+I+G-Te S+Td+Te=I+G+B i.e. injections =leakages
Government Spending G
Firms
Households
Government
Tax
Consumption C
Abroad
Imports M
Y=C+I+G+XM
or S + T + M = I + G +X
Depreciation Indirect taxes Net National Product at market prices NNP Rental income Profits National Income at factor cost
Income from employment
Government G Investment I
Consumption C
Wages
Questions
The following is information from the national income accounts for a hypothetical country: GDP (Y) = 6000 Personal disposable income Yd = 5,100 Government budget deficit (G-T) = 200 Consumption (C) = 3,800 Trade 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. How might 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-country comparisons of the standard of living. What criticisms would you make of such measures?