Chapter 20

Introduction to macroeconomics
and national income accounting

David Begg, Stanley Fischer and Rudiger Dornbusch, Economics,

6th Edition, McGraw-Hill, 2000
Power Point presentation by Peter Smith

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.
20.2

Some key issues in macroeconomics

Inflation

Unemployment

the rate of change of the general price level

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

20.3

More key issues in macroeconomics

Economic growth

increases in real GNP, an indication of

the expansion of the economys total
output

Macroeconomic policy

a variety of policy measures used by the

government to affect the overall
performance of the economy
20.4

Inflation in the UK, 1950-99

30
25
% p.a.

20
15
10
5
0

Source: Economic Trends Annual Supplement, Labour Market Trends

20.5

Inflation in selected European countries

Germany
France
Belgium
EU
Finland
UK
Spain
Italy
Portugal
Greece

% change 1998 compared with 1997

20.6

% p.a.

Inflation in UK, USA and Germany

16
14
12
10
8
6
4
2
0

1960-73

1973-81
UK

USA

1981-90

1990-98

Germany

20.7

Unemployment in the UK, 1950-99

14
12
% p.a.

10
8
6
4
2
0

Source: Economic Trends Annual Supplement, Labour Market Trends

20.8

Unemployment
in selected European countries
Germany
France
Belgium
EU
Finland
UK
Spain
Italy
Portugal
Greece

10

15

20

% unemployment (ILO measure) 1998

20.9

Unemployment
in UK, USA and Germany
10

% p.a.

8
6
4
2
0

1960-73

1973-81
UK

USA

1981-90

1990-98

Germany

20.10

Economic growth
in UK, USA and Germany
5

% p.a.

4
3
2
1
0

1960-73

1973-81
UK

USA

1981-90

1990-98

Germany

20.11

The circular flow of income,

expenditure and output
I
C

C+I

Households

Firms

20.12

Government in the circular flow

I
C+I+G

G
Households

C + I + G - Te

Te

Government

Firms

B - Td
Y + B - Td

20.13

Adding the foreign sector

To incorporate the foreign sector into

the circular flow

we must recognize that residents of

a country will buy imports from
abroad

and that domestic firms will sell

(export) goods and services abroad.
20.14

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

20.15

Three measures of national output

Expenditure

Income

the sum of expenditures in the economy

Y=C+I+G+X-Z
the sum of incomes paid for factor services
wages, profits, etc.

Output

the sum of output (value added) produced

in the economy

20.16

National income accounting: a summary

NYA

GNP
(and
GNI)
at
market
prices

G
I
X-Z
C

NYA

Deprec'n
Indirect
taxes

GDP
NNP
at
market at basic National
prices prices income

Profits,
rents
Selfemployment

Wages
and
salaries

20.17

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

20.18