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Introduction Modules 11 and 12. Module 11 – Macroeconomics Overview. This module is a first introduction to macroeconomics Important topics are Potential output Production possibility curve Actual output Economic circulation Demand for the output. WHAT DO ECONOMISTS STUDY?.

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Introduction

Modules 11 and 12


Module 11 macroeconomics overview
Module 11 – Macroeconomics Overview

  • This module is a first introduction to macroeconomics

  • Important topics are

    • Potential output

    • Production possibility curve

    • Actual output

    • Economic circulation

    • Demand for the output


What do economists study
WHAT DO ECONOMISTS STUDY?

  • Macroeconomic issues

    • growth

    • unemployment

    • inflation

    • balance of payments problems

    • cyclical fluctuations


Potential output
Potential Output

  • Potential output is linked to the economy's supply side or productive capacity

  • What can be produced, given the limited supply of the factors of production and the technological state of the economy

  • Potential output will grow over time because the supply of factors of production increase and above all due to technological growth



Actual output
Actual output

  • Actual output is known as Gross National Product (GNP), and there are several ways to measuring the overall level of economic activity

    • The production approach (GNP)

    • The spending (expenditure) approach (GNE)

    • The income approach (GNI)




The circular flow of goods and incomes

Goods and services

£

Consumer

expenditure


The circular flow of goods and incomes

Goods and services

£

Consumer

expenditure

Services of factors of production (labour, etc)


The circular flow of goods and incomes

Goods and services

£

Consumer

expenditure

Wages, rent

dividends, etc.

£

Services of factors of production (labour, etc)


The circular flow of goods and incomes

Goods and services

£

Consumer

expenditure

GOODS MARKETS

FACTOR MARKETS

Wages, rent

dividends, etc.

£

Services of factors of production (labour, etc)


Measuring the activity
Measuring the activity

  • GNP (or more correctly GDP) as a production approach is the value of all final goods produced in the economy

  • Demand for what is produced can conveniently be divided into various groups

    • Private consumption (C)

    • Private investment (I)

    • Government (G)

    • The foreign sector (X – Z)

  • The factors of production receive income for their efforts

  • GNP = GNE = GNI = Y

  • Y = C + I + G + X – Z


Module 12 potential output
Module 12 – Potential Output

  • We have already established that potential output is closely related to the productive capacity of the economy

  • In macroeconomics, it is frequently expressed by the production possibilitu curve (PPC)

    • PPC shows what can be produced using all available resources as efficiently as possible


Units of food Units of clothing

(millions) (millions)

8m 0.0

7m 2.2m

6m 4.0m

5m 5.0m

4m 5.6m

3m 6.0m

2m 6.4m

1m 6.7m

0 7.0m

A production possibility curve

Units of food (millions)

Units of clothing (millions)


A production possibility curve

a

Units of food Units of clothing

(millions) (millions)

a 8m 0.0

7m 2.2m

6m 4.0m

5m 5.0m

4m 5.6m

3m 6.0m

2m 6.4m

1m 6.7m

0 7.0m

Units of food (millions)

Units of clothing (millions)


A production possibility curve

b

Units of food Units of clothing

(millions) (millions)

8m 0.0

b 7m 2.2m

6m 4.0m

5m 5.0m

4m 5.6m

3m 6.0m

2m 6.4m

1m 6.7m

0 7.0m

Units of food (millions)

Units of clothing (millions)


A production possibility curve

c

Units of food Units of clothing

(millions) (millions)

8m 0.0

7m 2.2m

c 6m 4.0m

5m 5.0m

4m 5.6m

3m 6.0m

2m 6.4m

1m 6.7m

0 7.0m

Units of food (millions)

Units of clothing (millions)


A production possibility curve

Units of food Units of clothing

(millions) (millions)

8m 0.0

7m 2.2m

6m 4.0m

5m 5.0m

4m 5.6m

3m 6.0m

2m 6.4m

1m 6.7m

0 7.0m

Units of food (millions)

Units of clothing (millions)


1

1

Increasing opportunity costs

x

y

Units of food (millions)

Units of clothing (millions)


1

1

2

1

Increasing opportunity costs

x

y

Units of food (millions)

z

Units of clothing (millions)


Making a fuller use of resources

x

Production inside

the production

possibility curve

y

v

Food

O

Clothing


Growth in potential output

Now

Food

O

Clothing


Growth in potential output

5 years’ time

Food

Now

O

Clothing


Unemployment
Unemployment

  • The textbook does not give any thorough discussion on unemployment

  • It is sometimes helpful to separate unemployment into two parts

    • Equilibrium (natural) unemployment

    • Disequilibrium (involuntary) unemployment

    • The labour market is (almost) like any other market – supply and demand


Causes of unemployment
CAUSES OF UNEMPLOYMENT

  • Disequilibrium unemployment

    • real-wage (classical) unemployment

    • demand-deficient (cyclical) unemployment

    • unemployment arising from a growth in the labour supply


Causes of unemployment1
CAUSES OF UNEMPLOYMENT

  • Equilibrium unemployment

    • frictional (search) unemployment

    • structural unemployment

      • changing pattern of demand

      • regional unemployment

      • technological unemployment

    • seasonal unemployment












Unemployment rates in selected industrial countries10
Unemployment rates in selected industrial countries

Germany

Japan

UK

OECD

USA

France


Unemployment rates in selected industrial countries11
Unemployment rates in selected industrial countries

Germany

Japan

UK

OECD

USA

France


Disequilibrium unemployment
Disequilibrium unemployment

Qe

ASL

Average (real) wage rate

We

ADL

O

No. of workers


Disequilibrium unemployment1
Disequilibrium unemployment

B

A

Q2

Q1

ASL

Average (real) wage rate

W2

We

ADL

O

No. of workers


Equilibrium and disequilibrium unemployment
Equilibrium and disequilibrium unemployment

ASL

Average (real) wage rate

e

We

ADL

O

Qe

No. of workers


Equilibrium unemployment
Equilibrium unemployment

d

Q2

ASL

N

Average (real) wage rate

e

We

ADL

O

Qe

No. of workers


Equilibrium and disequilibrium unemployment1
Equilibrium and disequilibrium unemployment

Disequilibrium

unemployment

ASL

Average (real) wage rate

b

a

W2

e

We

ADL

O

No. of workers


Equilibrium and disequilibrium unemployment2
Equilibrium and disequilibrium unemployment

Equilibrium

unemployment

ASL

N

Disequilibrium

unemployment

Average (real) wage rate

b

a

c

W2

e

We

ADL

O

No. of workers


Real wage unemployment
Real-wage unemployment

b

b’

a

Q2

Q1

ASL

Average (real) wage rate

W1

We

ADL 2

ADL

O

Qe

No. of workers


Demand deficient unemployment
Demand-deficient unemployment

W2

Q2

ASL

Average (real) wage rate

W1

ADL1

ADL2

O

Q1

No. of workers


Arthur okun
Arthur Okun

  • The connection between unemployment and GDP growth is often formally summarised by the statistical relationship known as "Oakum's law" as developed by the late economist Arthur Oakum in 1962, the "law" related decreases in the unemployment rate to increases in output growth.

    • In his original research, Oakum found that a 1-percentage-point decline in the unemployment rate was, on average, associated with additional output growth of about 3 percentage points

    • Oakum's law is now widely accepted as stating that a 1-percentage-point decrease in the unemployment rate is associated with additional output growth of about 2 percent

    • The negative correlation between changes in the unemployment rate and changes in GDP growth is viewed as one of the most consistent relationships in macroeconomics.


Relationship between inflation and unemployment
RELATIONSHIP BETWEENINFLATION AND UNEMPLOYMENT

  • Aggregate demand and inflation and unemployment

    • effects of increases in aggregate demand (relative to potential output)

    • how the objectives vary with the course of the business cycle

  • The Phillips curve

    • the original curve

    • the apparent policy implications


The original phillips curve
The original Phillips curve

Wage inflation (%)

Unemployment (%)


Inflation (%)

The breakdown of the Phillips curve?

65

62

66

61

64

67

63

60

Unemployment (%)


Inflation (%)

The breakdown of the Phillips curve?

Original Phillips curve

65

62

66

61

64

67

63

60

Unemployment (%)


Inflation (%)

The breakdown of the Phillips curve?

74

71

73

72

70

69

65

68

62

66

61

64

67

63

60

Unemployment (%)


Inflation (%)

The breakdown of the Phillips curve?

75

76

74

77

79

71

73

78

72

70

69

65

68

62

66

61

64

67

63

60

Unemployment (%)


Inflation (%)

The breakdown of the Phillips curve?

75

80

76

74

77

79

81

71

73

82

78

72

70

85

69

84

65

83

68

62

66

61

64

67

63

60

Unemployment (%)


Inflation (%)

The breakdown of the Phillips curve?

75

80

76

74

77

79

81

90

71

73

82

89

78

72

70

91

85

69

84

88

65

83

68

87

62

66

95

86

92

61

94

64

67

93

63

60

Unemployment (%)


Inflation (%)

The breakdown of the Phillips curve?

75

80

76

74

77

79

81

90

71

73

82

89

78

72

70

91

85

69

84

88

65

83

68

87

62

98

66

00

95

86

92

97

61

94

64

67

96

01

99

93

63

02

60

Unemployment (%)


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