Economics TENTH EDITION by David Begg, Gianluigi Vernasca, Stanley Fischer & Rudiger Dornbusch Chapter 15 Introduction to macroeconomics ©Mc. Graw-Hill Companies, 2010
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. ©Mc. Graw-Hill Companies, 2010
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 ©Mc. Graw-Hill Companies, 2010
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 ©Mc. Graw-Hill Companies, 2010
Inflation in the UK, 1960 -2010 Source: Economic Trends Annual Supplement, Labour Market Trends ©Mc. Graw-Hill Companies, 2010
Unemployment in UK and USA ©Mc. Graw-Hill Companies, 2010
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 ©Mc. Graw-Hill Companies, 2010
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. ©Mc. Graw-Hill Companies, 2010
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 ©Mc. Graw-Hill Companies, 2010
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 ©Mc. Graw-Hill Companies, 2010
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 income Wages and salaries C ©Mc. Graw-Hill Companies, 2010
UK national accounts 2008 (£bn, current prices) Income measure Income source C by households 891 Employment At market prices: 770 Profits and rents Other 429 83 C by government and non-profit organizations 350 I by private firms and government 245 GDP at basic prices 1282 NX – 40 Indirect taxes 164 GDP at market prices 1446 Net property income from abroad 25 GNP (GNI) at market prices 1471 ©Mc. Graw-Hill Companies, 2010 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 ©Mc. Graw-Hill Companies, 2010
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) ©Mc. Graw-Hill Companies, 2010 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 ©Mc. Graw-Hill Companies, 2010 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. ©Mc. Graw-Hill Companies, 2010
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 ©Mc. Graw-Hill Companies, 2010
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