MacroeconomicsMacroeconomics20122012

Prof Michael T. NoelCollege of Business Administration Education

Topics:Topics:

Definition of MacroeconomicMacroeconomic problemCircular flow of income and

expenditure

What is macroeconomics?What is macroeconomics?

Macroeconomics: analysis of the economy as a whole.

Factors affecting macroeconomics output (GDP or GNP)a. consumption expenditureb. Investment expenditurec. Government expenditured. Balance of payment

The Economic ProblemThe Economic Problem::

How do we use scarce resources to best satisfy unlimited human wants?

Illustration of Illustration of macroeconomic problemsmacroeconomic problems

Input:a.Consumption expenditureb.Investment expenditurec.Government expenditured.Balance of payment

Output:GDP/GNP

GROSS DOMESTIC GROSS DOMESTIC PRODUCTPRODUCTThe market value of all goods and services

produced within a country in a given period of time.

It can be measured as all the EXPENDITURES to buy the goods and services produced.

It can also be measured as all the INCOME earned from producing the goods and services.

Since every peso spent is someone’s income, the two measures give the same result.

Flow of income and Flow of income and expenditure is present in expenditure is present in every economic activitiesevery economic activities

A. ConsumptionB. ProductionC. TaxationD. Transfer of paymentE. ImportationF. Exportation

Gross Domestic Product Gross Domestic Product The circular flow diagram shows the transactions among households, firms, governments, and the rest of the world.

Gross Domestic Product Gross Domestic Product Firms hire factors of production from households. The blue flow, Y, shows total income paid by firms to households.

Gross Domestic Product Gross Domestic Product ◦Households buy consumer goods and services. The red flow, C, shows consumption expenditures.

Gross Domestic Product Gross Domestic Product Households save, S, and pay taxes, T. Firms borrow some of what households save to finance their investment.

Gross Domestic Product Gross Domestic Product ◦Firms buy capital goods from other firms. The red flow I represents this investment expenditure by firms.

Gross Domestic Product Gross Domestic Product ◦Governments buy goods and services, G, and borrow or repay debt if spending exceeds or is less than taxes

Gross Domestic Product Gross Domestic Product The rest of the world buys goods and services from us, X and sells us goods and services, M—net exports are X - M

Gross Domestic Product Gross Domestic Product And the rest of the world borrows from us or lends to us depending on whether net exports are positive or negative.

Gross Domestic Product Gross Domestic Product ◦The blue and red flows are the circular flow of income and expenditure. The green flows are borrowing, lending, and taxes.

Gross Domestic Product Gross Domestic Product

The sum of the red flows equals the blue flow.

Gross Domestic Product Gross Domestic Product

◦That is: Y = C + I + G + X - M

ExpendituresExpendituresExpenditures are purchases of goods

and services.Expenditures are

◦ Consumption (C)◦ Investment (I)◦ Government spending (on goods and

services) (G)◦ Net Exports (X-M)

Exports (X) Imports (M)

Expenditures equal Expenditures equal IncomeIncomeExpenditures= C + I + G + X – M

All expenditures become someone’s income so

Y (income) = C + I + G + X – M

GovernmentGovernmentGovernment spending:

◦ Goods and services (G) Roads, health care, education, helicopters, police

officers salaries, judges salaries.Government revenue:

◦ Taxes◦ (Income from Crown corporations)◦ (Tariffs)◦ Less Transfers to persons (part of net taxes)

GST rebates, unemployment insurance, pensions, subsidies

Interest on the debt (substantial) NOTE: The gov’t is not buying services, so

transfers are not an expenditure.

Budgetary Deficits and Budgetary Deficits and SurplusesSurplusesSpending

◦ Goods and services (G) + Transfers to persons (Tr)

Revenue◦ Taxes (Tx)

Net Taxes◦ Tx – Tr = NT

Surplus G + Tr < Tx G < Tx – Tr G < NT

Deficit G + Tr > Tx G > Tx – Tr G > NT

Savings and InvestmentSavings and InvestmentInvestment is financed by savings

Savings have three sources:◦Savings by households

The part of income households do not spend on consumption or net taxes.

(S = Y - C - NT)◦Savings by governments

NT – G = savings◦Savings of foreigners

M – X = foreign borrowing

STOCKS AND FLOWSSTOCKS AND FLOWSFLOWS

◦ Income : the goods and services produced each year

◦ Deficits: The excess of spending over income each year

◦ Investment: Goods produced to be used in production each year

◦ Surpluses: The excess of revenue over expenditures each year.

STOCKS◦ Wealth: All the

goods a person owns. Wealth is the sum of past net saving.

◦ Debt: the sum of all past deficits less all past surpluses

◦ Capital: All the investment goods owned. Capital is the sum of past net investment

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