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7. Aggregate Demand and Supply and Macroeconomic Problems. Macroeconomic Objectives. Distinction between microeconomics and macroeconomics The major macroeconomic issues economic growth unemployment inflation balance of payments and exchange rates

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7. Aggregate Demand and Supply and Macroeconomic Problems


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slide1

7. Aggregate Demand and Supply

and Macroeconomic Problems

macroeconomic objectives
Macroeconomic Objectives
  • Distinction between microeconomics and macroeconomics
  • The major macroeconomic issues
    • economic growth
    • unemployment
    • inflation
    • balance of payments and exchange rates
      • balance of payments deficits and surpluses
      • exchange rate movements
slide5

Consumption of

domestically

produced goods

and services (Cd)

Factor

payments

The circular flow of income

Firms

Households

the circular flow of income1
The Circular Flow of Income
  • Withdrawals
    • net saving
    • net taxes
    • import expenditure
  • Injections
    • investment
    • government expenditure
    • export expenditure
slide7

Export

expenditure (X)

Investment (I)

Government

expenditure (G)

BANKS, etc

ABROAD

GOV.

Import

expenditure (M)

Net

taxes (T)

Net

saving (S)

The circular flow of income

INJECTIONS

Consumption of

domestically

produced goods

and services (Cd)

Factor

payments

WITHDRAWALS

the circular flow of income2
The Circular Flow of Income
  • The relationship between injections and withdrawals
    • the links between them
slide9

Export

expenditure (X)

Investment (I)

Government

expenditure (G)

BANKS, etc

ABROAD

GOV.

Import

expenditure (M)

Net

taxes (T)

Net

saving (S)

The circular flow of income

INJECTIONS

Consumption of

domestically

produced goods

and services (Cd)

Factor

payments

WITHDRAWALS

the circular flow of income3
The Circular Flow of Income
  • The relationship between injections and withdrawals
    • the links between them
    • planned injections may not equal planned withdrawals
the circular flow of income4
The Circular Flow of Income
  • The relationship between injections and withdrawals
    • the links between them
    • planned injections may not equal planned withdrawals
  • Equilibrium in the circular flow
slide12

Export

expenditure (X)

Investment (I)

Government

expenditure (G)

BANKS, etc

ABROAD

GOV.

Import

expenditure (M)

Net

taxes (T)

Net

saving (S)

The circular flow of income

INJECTIONS

Consumption of

domestically

produced goods

and services (Cd)

Factor

payments

WITHDRAWALS

the circular flow of income5
The Circular Flow of Income
  • The relationship between injections and withdrawals
    • the links between them
    • planned injections may not equal planned withdrawals
  • Equilibrium in the circular flow
  • The circular flow and the four macroeconomic objectives
slide14

Export

expenditure (X)

Investment (I)

Government

expenditure (G)

BANKS, etc

ABROAD

GOV.

Import

expenditure (M)

Net

taxes (T)

Net

saving (S)

The circular flow of income

INJECTIONS

Consumption of

domestically

produced goods

and services (Cd)

Factor

payments

WITHDRAWALS

measuring national income
Measuring national income
  • GDP: the measure of national income
  • Methods of measuring GDP
    • the product approach
    • the income approach
    • the expenditure approach
  • The product approach
    • measuring GVA
uk gva product based measure 1998
UK GVA product-based measure: 1998

1.3

3.9

19.7

5.3

12.0

3.2

8.4

2.4

21.3

5.4

11.9

5.2

100.0

Agriculture, forestry and fishing £9 656 m

Mining, energy and water supply £29 485 m

Manufacturing

£147 306 m

Construction £39 262 m

Wholesale and retail trade; repairs £89 392 m

Hotels and restaurants £23 678m

Transport and communication £63 340 m

Banking, finance, insurance, etc.

£17 737 m

Letting of property £159 240 m

Public administration and defence £40 495 m

Education, health and social work £89 041 m

Other services £38 912 m

Gross value added (GVA) at basic prices

£747 544 m

Percentage of GVA

measuring national income1
Measuring national income
  • GDP: the measure of national income
  • Methods of measuring GDP
    • the product approach
    • the income approach
    • the expenditure approach
  • The product approach
    • measuring GVA
  • The income approach
uk gva by category of income 1998
UK GVA by category of income: 1998

62.0

29.9

5.8

2.3

100.0

Compensation of employees

(wages and salaries)

£463 398 m

Operating surplus

(gross profit, rent and interest of firms

government and other institutions)

£223 212 m

Mixed incomes

£43 379 m

Tax less subsidies on production

(other than those on products) plus

statistical discrepancy £17 555 m

Gross value added (GVA) at basic prices

£747 544m

Percentage of GVA

measuring national income2
Measuring national income
  • GDP: the measure of national income
  • Methods of measuring GDP
    • the product approach
    • the income approach
    • the expenditure approach
  • The product approach
    • measuring GVA
  • The income approach
    • from GVA to GDP
uk gdp 1998
UK GDP: 1998

Gross value added (GVA) at basic prices £747 544m

uk gdp 19981
UK GDP: 1998

Gross value added (GVA) at basic prices £747 544m

plus Taxes on products £103 634m

uk gdp 19982
UK GDP: 1998

Gross value added (GVA) at basic prices £747 544m

plus Taxes on products £103 634m

less Subsidies on products £7 453m

uk gdp 19983
UK GDP: 1998

Gross value added (GVA) at basic prices £747 544m

plus Taxes on products £103 634m

less Subsidies on products £7 453m

GDP (at market prices) £843 725m

measuring national income3
Measuring national income
  • GDP: the measure of national income
  • Methods of measuring GDP
    • the product approach
    • the income approach
    • the expenditure approach
  • The product approach
    • measuring GVA
  • The income approach
  • The expenditure approach
measuring national income4
Measuring national income
  • GDP: the measure of national income
  • The product approach
  • The income approach
  • The expenditure approach
  • From GDP to net national income (NNY)
economic growth and the business cycle
Economic Growth andthe Business Cycle
  • Growth in actual and potential output
  • Economic growth and the business cycle
    • fluctuations in actual growth
the business cycle
The business cycle

Potential output

Actual

output

National output

O

Time

economic growth and the business cycle1
Economic Growth andthe Business Cycle
  • Growth in actual and potential output
  • Economic growth and the business cycle
    • fluctuations in actual growth
    • the phases of the business cycle
the business cycle1
The business cycle

3

4

2

1

Potential output

National output

Actual

output

3

4

2

1

O

Time

economic growth and the business cycle2
Economic Growth andthe Business Cycle
  • Growth in actual and potential output
  • Economic growth and the business cycle
    • fluctuations in actual growth
    • the phases of the business cycle
    • trend growth
the business cycle2
The business cycle

Trend

output

Potential output

National output

Actual

output

O

Time

economic growth and the business cycle3
Economic Growth andthe Business Cycle
  • Economic growth and the business cycle
    • fluctuations in actual growth
    • the phases of the business cycle
    • trend growth
    • the business cycle in practice
economic growth and the business cycle4
Economic Growth andthe Business Cycle
  • Economic growth and the business cycle
    • fluctuations in actual growth
    • the phases of the business cycle
    • trend growth
    • the business cycle in practice
      • the irregularity of the cycle
economic growth and the business cycle5
Economic Growth andthe Business Cycle
  • Economic growth and the business cycle
    • fluctuations in actual growth
    • the phases of the business cycle
    • trend growth
    • the business cycle in practice
      • the irregularity of the cycle
      • the length of the phases
economic growth and the business cycle6
Economic Growth andthe Business Cycle
  • Economic growth and the business cycle
    • fluctuations in actual growth
    • the phases of the business cycle
    • trend growth
    • the business cycle in practice
      • the irregularity of the cycle
      • the length of the phases
      • the magnitude of the phases
economic growth and the business cycle7
Economic Growth andthe Business Cycle
  • Causes of actual growth
    • aggregate demand
    • aggregate demand relative to potential output
  • Actual growth in practice
    • experience since 1970
growth rates in selected industrial countries2
Growth rates in selected industrial countries

UK

France

Annual growth rate (%)

growth rates in selected industrial countries3
Growth rates in selected industrial countries

UK

France

Annual growth rate (%)

growth rates in selected industrial countries4
Growth rates in selected industrial countries

Germany

UK

France

Annual growth rate (%)

growth rates in selected industrial countries5
Growth rates in selected industrial countries

Germany

UK

France

Annual growth rate (%)

growth rates in selected industrial countries6
Growth rates in selected industrial countries

Germany

UK

USA

France

Annual growth rate (%)

growth rates in selected industrial countries7
Growth rates in selected industrial countries

Germany

UK

USA

France

Annual growth rate (%)

growth rates in selected industrial countries8
Growth rates in selected industrial countries

Germany

UK

Japan

USA

France

Annual growth rate (%)

growth rates in selected industrial countries9
Growth rates in selected industrial countries

Germany

UK

Japan

USA

France

Annual growth rate (%)

economic growth and the business cycle8
Economic Growth andthe Business Cycle
  • Causes of potential growth
    • increases in the quantity of factors
      • capital
      • labour
      • land and raw materials
      • the problem of diminishing returns
    • increases in factor productivity
  • Policies to achieve growth
    • demand-side and supply-side policies
    • market-orientated & interventionist policies
unemployment
Unemployment
  • The meaning of 'unemployment'
  • Official measures of unemployment
    • claimant unemployment
      • do claimant statistics give a true picture of unemployment?
    • standardised unemployment (ILO/OECD)
unemployment1
Unemployment
  • Unemployment and the labour market
    • the aggregate demand and supply of labour
    • equilibrium in the model
aggregate demand and supply of labour
Aggregate demand and supply of labour

ASL

ADL

Qe

Average (real) wage rate

We

O

No. of workers

unemployment2
Unemployment
  • Unemployment and the labour market
    • the aggregate demand and supply of labour
    • equilibrium in the model
    • disequilibrium unemployment
disequilibrium unemployment
Disequilibrium unemployment

B

A

W2

Q2

Q1

ASL

Average (real) wage rate

We

ADL

O

No. of workers

unemployment3
Unemployment
  • Unemployment and the labour market
    • the aggregate demand and supply of labour
    • equilibrium in the model
    • disequilibrium unemployment
    • equilibrium unemployment
equilibrium unemployment
Equilibrium unemployment

ASL

Average (real) wage rate

e

We

ADL

O

Qe

No. of workers

equilibrium unemployment1
Equilibrium unemployment

d

Q2

ASL

N

Average (real) wage rate

e

We

ADL

O

Qe

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 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

unemployment4
Unemployment
  • Disequilibrium unemployment
    • real-wage (classical) unemployment
    • demand-deficient (cyclical) unemployment
    • unemployment arising from a growth in the labour supply
unemployment5
Unemployment
  • Equilibrium unemployment
    • frictional (search) unemployment
    • structural unemployment
      • changing pattern of demand
      • technological unemployment
      • regional unemployment
    • seasonal unemployment
aggregate demand and supply
Aggregate Demand and Supply
  • The aggregate demand curve
aggregate demand and aggregate supply
Aggregate demand and aggregate supply

AD

Price level

O

National output

aggregate demand and supply1
Aggregate Demand and Supply
  • The aggregate demand curve
    • Why aggregate demand curves slope downwards
      • import effect
aggregate demand and aggregate supply1
Aggregate demand and aggregate supply

AD

Price level

O

National output

aggregate demand and supply2
Aggregate Demand and Supply
  • The aggregate demand curve
    • Why aggregate demand curves slope downwards
      • import effect
      • interest-rate effect
aggregate demand and aggregate supply2
Aggregate demand and aggregate supply

AD

Price level

O

National output

aggregate demand and supply3
Aggregate Demand and Supply
  • The aggregate demand curve
    • Why aggregate demand curves slope downwards
      • import effect
      • interest-rate effect
      • savings effect
aggregate demand and aggregate supply3
Aggregate demand and aggregate supply

AD

Price level

O

National output

aggregate demand and supply4
Aggregate Demand and Supply
  • The aggregate demand curve
    • Why aggregate demand curves slope downwards
      • import effect
      • interest-rate effect
      • savings effect
  • The aggregate supply curve
aggregate demand and aggregate supply4
Aggregate demand and aggregate supply

AS

AD

Price level

O

National output

aggregate demand and supply5
Aggregate Demand and Supply
  • The aggregate demand curve
    • Why aggregate demand curves slope downwards
      • import effect
      • interest-rate effect
      • savings effect
  • The aggregate supply curve
    • Why aggregate supply curves generally slope upwards
aggregate demand and aggregate supply5
Aggregate demand and aggregate supply

AS

AD

Price level

O

National output

aggregate demand and supply6
Aggregate Demand and Supply
  • The aggregate demand curve
    • Why aggregate demand curves slope downwards
      • import effect
      • interest-rate effect
      • savings effect
  • The aggregate supply curve
    • Why aggregate supply curves generally slope upwards
  • Equilibrium
aggregate demand and aggregate supply6
Aggregate demand and aggregate supply

AS

Price level

Pe

AD

O

National output

aggregate demand and aggregate supply7
Aggregate demand and aggregate supply

a

b

AS

Price level

Pe

P2

AD

O

National output

aggregate demand and supply7
Aggregate Demand and Supply
  • The aggregate demand curve
    • Why aggregate demand curves slope downwards
      • import effect
      • interest-rate effect
      • savings effect
  • The aggregate supply curve
    • Why AS curves generally slope upwards
  • Equilibrium
    • Effect of a shift in the AD curve
inflation
Inflation
  • Defining inflation
  • The costs of inflation
    • redistribution
    • uncertainty
    • balance of payments
    • resources used to cope with inflation
  • Experience of inflation since 1965
inflation1
Inflation
  • Types of inflation
    • demand pull
demand pull inflation
Demand-pull inflation

AS

Price level

P1

AD1

O

Q1

National output

demand pull inflation1
Demand-pull inflation

AS

Price level

P1

AD2

AD1

O

Q1

National output

demand pull inflation2
Demand-pull inflation

Q2

AS

Price level

P2

P1

AD2

AD1

O

Q1

National output

inflation2
Inflation
  • Types of inflation
    • demand pull
    • cost push
inflation3
Inflation
  • Types of inflation
    • demand pull
    • cost push
      • wage push
inflation4
Inflation
  • Types of inflation
    • demand pull
    • cost push
      • wage push
      • profit push
inflation5
Inflation
  • Types of inflation
    • demand pull
    • cost push
      • wage push
      • profit push
      • import-price push
cost push inflation
Cost-push inflation

AS1

Price level

P1

AD

O

Q1

National output

cost push inflation1
Cost-push inflation

AS2

AS1

Price level

P1

AD

O

Q1

National output

cost push inflation2
Cost-push inflation

Q2

AS2

AS1

Price level

P2

P1

AD

O

Q1

National output

inflation6
Inflation
  • Types of inflation
    • demand pull
    • cost push
      • wage push
      • profit push
      • import-price push
    • the interaction of demand-pull and cost-push inflation
the interaction of demand pull and cost push inflation1
The interaction of demand-pull and cost-push inflation

P2

AS2

AS1

Price level

P1

AD2

AD1

O

National output

the interaction of demand pull and cost push inflation2
The interaction of demand-pull and cost-push inflation

P3

AS3

AS2

AS1

Price level

P2

AD3

P1

AD2

AD1

O

National output

inflation7
Inflation
  • Types of inflation
    • demand pull
    • cost push
      • wage push
      • profit push
      • import-price push
    • the interaction of demand-pull and cost-push inflation
    • structural (demand shift)
inflation8
Inflation
  • Types of inflation
    • demand pull
    • cost push
      • wage push
      • profit push
      • import-price push
    • the interaction of demand-pull and cost-push inflation
    • structural (demand shift)
    • expectations and inflation
inflation9
Inflation
  • Policies to tackle inflation
    • demand-side policies
    • supply-side policies