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EP A Macroeconomics The Income and Output of Nations Week 7, Lecture 2

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EP A Macroeconomics The Income and Output of Nations Week 7, Lecture 2

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    1. EP& A Macroeconomics The Income and Output of Nations Week 7, Lecture 2

    2. 1 Circular Flow Between Firms and Households (real resources)

    3. 2 Circular Flow Between Firms and Households (corresponding flow of payments)

    4. 3 Circular Flow Between Firms and Households

    5. 4 Three measures of national output Expenditure the sum of expenditures in the economy Income the sum of incomes all factor incomes Output the sum of output (value added) produced in the economy All three approaches are should give you the same final figure for national output

    6. 5 Circular Flow Between Firms and Households

    7. 6 Measuring Output Total value added is the economys net output after deducting goods used during production to avoid double counting E.g. egg, milk, flour used for making muffins Gross domestic product (GDP) measures the output produced by factors of production located in the domestic economy

    8. 7 Leakages from the Circular Flow Leakages (in terms of flow of payment) money paid to the households but not returned to firm Or flow of payments that started from firms but did not return back to firms e.g. household savings, net taxes and imports

    9. 8 Circular Flow Between Firms and Households (corresponding flow of payments)

    10. 9 Injections into the Circular Flow Injections (in terms of flow of payment) are revenue for firms not from sales to household e.g. investment by firms, government purchases and exports

    11. 10 Circular Flow Between Firms and Households (corresponding flow of payments)

    12. 11 The Circular Flow of Income with Government and Foreign Trade Government spends money on goods & services (G) finances welfare payments, i.e. transfer payments (B) this spending is financed by tax (T) Export (X) made at home but sold abroad Import (Z) made abroad and bought at home

    13. 12 The Circular Flow of Income in Symbols Domestic Output (GDP) is either Consumed (C) Invested (I) Bought by the Government (G) Bought by the foreigners, net exports (X-Z) Factor Incomes are spent on Consumption (C) Saving (S) Paying taxes net of benefits (T-B)

    14. 13 The Circular Flow of Income in Symbols GDP = C + I + G + (X Z) Factor Income = C + S + (T B) Since every things produced in the economy generates equivalent factor income Domestic Output (GDP) = Factor Incomes

    15. 14 The Circular Flow of Income in Symbols Domestic Output

    16. 15 The Circular Flow of Income in Symbols Domestic Output

    17. 16 The Circular Flow of Income in Symbols

    18. 17 GDP, GNP, Depreciation Gross National Product (GNP) total income of citizens wherever it is earned = GDP + Net Property Income (NPI) Depreciation wear and tear of capital stock National Income (factor earnings) = GNP Depreciation

    19. 18 GDP, GNP, Depreciation Nominal Gross National Product Measures national output at current prices = value of all goods at current prices Real Gross National Product Measures output at base year prices e.g. value of todays national output at 1995 prices Allows us eliminate the effect of price changes and see how real output evolves over time

    20. 19 GDP, GNP, Depreciation

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