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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

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Introduction modules 11 and 12

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


Potential and actual output in norway

Potential and Actual Output in Norway


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

The circular flow of goods and incomes


The circular flow of goods and incomes1

The circular flow of goods and incomes

Goods and services


Introduction modules 11 and 12

The circular flow of goods and incomes

Goods and services

£

Consumer

expenditure


Introduction modules 11 and 12

The circular flow of goods and incomes

Goods and services

£

Consumer

expenditure

Services of factors of production (labour, etc)


Introduction modules 11 and 12

The circular flow of goods and incomes

Goods and services

£

Consumer

expenditure

Wages, rent

dividends, etc.

£

Services of factors of production (labour, etc)


Introduction modules 11 and 12

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


Introduction modules 11 and 12

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)


Introduction modules 11 and 12

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)


Introduction modules 11 and 12

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)


Introduction modules 11 and 12

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)


Introduction modules 11 and 12

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)


Introduction modules 11 and 12

1

1

Increasing opportunity costs

x

y

Units of food (millions)

Units of clothing (millions)


Introduction modules 11 and 12

1

1

2

1

Increasing opportunity costs

x

y

Units of food (millions)

z

Units of clothing (millions)


Introduction modules 11 and 12

Making a fuller use of resources

x

Production inside

the production

possibility curve

y

v

Food

O

Clothing


Introduction modules 11 and 12

Growth in potential output

Now

Food

O

Clothing


Introduction modules 11 and 12

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 countries

Unemployment rates in selected industrial countries

UK


Unemployment rates in selected industrial countries1

Unemployment rates in selected industrial countries

UK


Unemployment rates in selected industrial countries2

Unemployment rates in selected industrial countries

UK

France


Unemployment rates in selected industrial countries3

Unemployment rates in selected industrial countries

UK

France


Unemployment rates in selected industrial countries4

Unemployment rates in selected industrial countries

Germany

UK

France


Unemployment rates in selected industrial countries5

Unemployment rates in selected industrial countries

Germany

UK

France


Unemployment rates in selected industrial countries6

Unemployment rates in selected industrial countries

Germany

UK

USA

France


Unemployment rates in selected industrial countries7

Unemployment rates in selected industrial countries

Germany

UK

USA

France


Unemployment rates in selected industrial countries8

Unemployment rates in selected industrial countries

Germany

Japan

UK

USA

France


Unemployment rates in selected industrial countries9

Unemployment rates in selected industrial countries

Germany

Japan

UK

USA

France


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 (%)


Introduction modules 11 and 12

Inflation (%)

The breakdown of the Phillips curve?

65

62

66

61

64

67

63

60

Unemployment (%)


Introduction modules 11 and 12

Inflation (%)

The breakdown of the Phillips curve?

Original Phillips curve

65

62

66

61

64

67

63

60

Unemployment (%)


Introduction modules 11 and 12

Inflation (%)

The breakdown of the Phillips curve?

74

71

73

72

70

69

65

68

62

66

61

64

67

63

60

Unemployment (%)


Introduction modules 11 and 12

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 (%)


Introduction modules 11 and 12

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 (%)


Introduction modules 11 and 12

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 (%)


Introduction modules 11 and 12

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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