Transcript Circular Flow Diagram

Chapter 19
Introduction to macroeconomics
David Begg, Stanley Fischer and Rudiger Dornbusch, Economics,
9th Edition, McGraw-Hill, 2008
PowerPoint presentation by Alex Tackie and Damian Ward
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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 Turkey
2003-2011
Inflation
20
18
16
14
12
10
8
6
4
2
0
2003
Source: TEPAV
2004
2005
2006
2007
2008
2009
5
2010
2011
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Inflation in UK, USA and
Germany 1960 - 2008
16
14
12
10
UK
USA
Germany
Annual % 8
6
4
2
0
1960-73
1973-81
1981-90
1990-01
2001-08
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Unemployment in Turkey
1988-2011
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
7
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
0.00
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Unemployment
in UK, USA and Germany
10
% p.a.
8
6
4
2
0
1960-73
1973-81
UK
1981-90
USA
1990-01
2001-08
Germany
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Economic Growth in Turkey
Growth (%)
12
10
9.4
9.2
8.5
8.4
8
6.9
6
6.2
5.3
4.7
4
2
0.7
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
-2
-4
-4.8
-6
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Economic Growth in the World
Growth (%)
8
7.5
7
6.2
6
5
5.3
4
3
6
5.7
4.1
3.9
3.5
3.2
2
2
1.6
1.4
1
0
2010
2011
Dünya
Gelişmiş Ülkeler
2012*
2013*
Gelişmekte Olan Ülkeler
10
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The Sectoral Division of
GDP in Turkey
25.0
20.0
15.0
2000
2010
10.0
5.0
0.0
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Economic growth
in UK, USA and Germany
5
% p.a.
4
3
2
1
0
1960-73
1973-81
UK
1981-90
USA
1990-01
2001-08
Germany
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Circular Flow Diagram
• Circular Flow Diagram shows how the
resources and products flow between
households, firms and the
government.
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The Circular-Flow Diagram
• Firms
– Produce and sell goods and services
– Hire and use factors of production
• Households
– Buy and consume goods and services
– Own and sell factors of production
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The Circular-Flow Diagram
• Markets for Goods and Services
– Firms sell
– Households buy
• Markets for Factors of Production
– Households sell
– Firms buy
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The Circular-Flow Diagram
• Factors of Production
– Inputs used to produce goods and
services
– Land, labor, and capital
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The circular flow of income,
expenditure and output
I
C
S
C+I
Households
Firms
Y
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Circular Flow Diagram
Consumption (C)
= 5000
Savings (S)
= 2000
Investment (I)
= 2000
Goods and Servies
Hosehold
Firms
Factors of Production
Factoral Income (Y)
= 7000
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Closed Economy without
Government
Y=C+I
• Households earn 7000 because they own factors of
production
• They spend 5000 and save 2000
• So,
– Y= C+S
• The savings are used for investment
• So,
– S = I is the case.
– Y = C+ I
– In other words, the output (Y) can be used for consumtion
(C) and investment (I).
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Investment and Savings
• Investment (I), is the spending for
acquiring newly produced physical capital.
– Buying an old factory is not an investment for
the economy.
• Savings (S), household income minus the
consumption
• If the savings are not under the pillow
then,
S=I
is always the case.
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Gross Domestic Product
• The market value of final goods and services that
are produced in a country within a specified time
by the residents of a country.
• Final goods and services: We have to exclude the
intermediate products in order not to have double
counting problem.
• Value added: The increase in value at the end of
the production process.
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Examples
• Ice-cream is a final good if it is consumed by the
households.
• Steel is an intermediate good because it will be
used for industries such as auto sector in the later
stages.
• The stocks are counted as final good.
• Machinary is a final good because the firms are
the final users for these products.
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Adding Goverment into the
Circular Flow Diagram
• What happens if we add government to
the circular flow diagram
– The government collects indirect taxes from
consumption and direct taxes from income and
uses for government purchases and transfer
payments.
•
•
•
•
Indirect taxes:
Te
Direct taxes:
Td
Government expenditure: G
Transfers:
B
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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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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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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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