ECONS II UPDATE (ML360)

The National Economy The Scope of Macroeconomics.

Macroeconomics •Macroeconomics is the economics of the economy as a whole and microeconomics is the economics of the single market. •Macroeconomics simplifies by ignoring differences among individual households. • Macroeconomics is important — and even interesting — because it affects all of us..

Fathers of modern macroeconomics • The foundation of macroeconomics was laid down by a British economist, John Maynard Keynes (1883 – 1946) in his revolutionary book “The General Theory of Employment, Interest and Money (1936)”. • Milton Friedman • James Tobin • Paul Samuelson • Robert E. Lucas Jr • Robert Solow • N. Gregory Mankiw etc..

Important issues in macroeconomics •Why does the cost of living keep rising? •Why are millions of people unemployed, even when the economy is booming? •Why are there recessions? •Can the government do anything to combat recessions? Should it?.

Important issues in macroeconomics •What is the government budget deficit? How does it affect the economy? •Why does Ghana have such a huge trade deficit? •Why are so many countries poor? •What policies might help them grow out of poverty?.

THE SCOPE OF MACROECONOMICS • Definitions • Rate of economic growth: The percentage increase in national output over a 12-month period. • Inflation: A persistent increase in the general price level over a given period of time. Rate of inflation is the percentage increase in prices over a 12-month period. • Unemployment: those of working age who are without work, but who are available for work at current wage rates..

THE SCOPE OF MACROECONOMICS • Definitions • Exchange rate: The rate at which one national currency exchanges for another. The rate is expressed as the amount of one currency that is necessary to purchase one unit of another currency (e.g. a Gh¢8 = $1) • Balance of payments account: A record of the country’s transactions with the rest of the world. It shows the country’s payments to or deposits in other countries (debits) and its receipts or deposits from other countries (credits).

THE SCOPE OF MACROECONOMICS • The major macroeconomic issues/Goals of Macroeconomics • (Rapid) economic growth: If output – real Gross Domestic Product (GDP)– grows faster than population, the average person can enjoy an improved standard of living • High Employment (Unemployment): The main source of households’ incomes is labour earnings. When unemployment is high, many people are without jobs and must cut back their purchases of goods and services.

THE SCOPE OF MACROECONOMICS • The major macroeconomic issues/Goals of Macroeconomics • Inflation (Stable Prices): This goal is important because inflation imposes costs on society. Therefore keeping inflation rate low helps to reduce these costs. • Balance of payments and stable exchange rates: A stable exchange rate will help reduce inflation, promote international trade and help the country achieve a favourable trade balance..

Economic growth (average % per annum), Unemployment (average %), Inflation (average % per annum) France Germany Italy Japan UK USA EU(15) OECD Brazil Malaysia Singapore Growth 1960-9 1970-9 1980-9 1990-9 2000–5 7.5 3.2 2.2 1.7 2.0 4.4 2.6 1.8 2.2 1.0 5.3 3.8 2.4 1.5 1.5 10.9 4.3 4.0 1.7 1.9 2.9 2.0 2.4 2.1 2.7 4.3 2.8 2.5 3.0 2.9 3.5 3.2 2.2 2.1 2.0 4.6 3.6 2.6 2.6 2.6 5.4 8.1 3.0 1.8 2.8 6.5 7.9 5.8 6.9 5.2 8.8 8.3 6.1 7.7 4.6 Unemployment 1960-9 1970-9 1980-9 1990-9 2000–5 1.5 3.7 9.0 10.6 9.2 0.9 2.3 5.9 7.7 8.9 5.1 6.4 9.5 10.4 9.0 1.3 1.7 2.5 3.7 5.0 2.2 4.5 10.0 8.1 5.1 4.1 6.1 7.2 5.8 5.3 2.5 4.0 9.3 9.2 7.9 2.5 4.3 7.3 6.9 6.7 n/a n/a n/a 9.3 10.5 n/a n/a 6.2 3.4 3.5 n/a n/a 3.6 2.8 3.8 Inflation 1960-9 1970-9 1980-9 1990-9 2000–5 4.2 9.4 7.3 2.0 1.8 3.2 5.0 2.9 2.2 1.4 4.4 13.9 11.2 4.7 2.7 4.9 9.0 2.5 0.8 –1.3 4.1 13.0 7.4 3.9 1.8 2.8 6.8 5.5 2.4 2.2 3.7 10.3 7.4 3.3 2.1 3.1 9.2 8.9 4.4 2.3 46.1 30.6 332.2 847.0 7.1 –0.3 7.3 2.2 3.6 1.6 1.1 5.9 2.5 1.9 1.0.

Economic growth (average % per annum), Unemployment (average %), Inflation (average % per annum) France Germany Italy Japan UK USA EU(15) OECD Brazil Malaysia Singapore Growth 1960-9 1970-9 1980-9 1990-9 2000–5 7.5 3.2 2.2 1.7 2.0 4.4 2.6 1.8 2.2 1.0 5.3 3.8 2.4 1.5 1.5 10.9 4.3 4.0 1.7 1.9 2.9 2.0 2.4 2.1 2.7 4.3 2.8 2.5 3.0 2.9 3.5 3.2 2.2 2.1 2.0 4.6 3.6 2.6 2.6 2.6 5.4 8.1 3.0 1.8 2.8 6.5 7.9 5.8 6.9 5.2 8.8 8.3 6.1 7.7 4.6 Unemployment 1960-9 1970-9 1980-9 1990-9 2000–5 1.5 3.7 9.0 10.6 9.2 0.9 2.3 5.9 7.7 8.9 5.1 6.4 9.5 10.4 9.0 1.3 1.7 2.5 3.7 5.0 2.2 4.5 10.0 8.1 5.1 4.1 6.1 7.2 5.8 5.3 2.5 4.0 9.3 9.2 7.9 2.5 4.3 7.3 6.9 6.7 n/a n/a n/a 9.3 10.5 n/a n/a 6.2 3.4 3.5 n/a n/a 3.6 2.8 3.8 Inflation 1960-9 1970-9 1980-9 1990-9 2000–5 4.2 9.4 7.3 2.0 1.8 3.2 5.0 2.9 2.2 1.4 4.4 13.9 11.2 4.7 2.7 4.9 9.0 2.5 0.8 –1.3 4.1 13.0 7.4 3.9 1.8 2.8 6.8 5.5 2.4 2.2 3.7 10.3 7.4 3.3 2.1 3.1 9.2 8.9 4.4 2.3 46.1 30.6 332.2 847.0 7.1 –0.3 7.3 2.2 3.6 1.6 1.1 5.9 2.5 1.9 1.0.

Economic growth (average % per annum), Unemployment (average %), Inflation (average % per annum) France Germany Italy Japan UK USA EU(15) OECD Brazil Malaysia Singapore Growth 1960-9 1970-9 1980-9 1990-9 2000–5 7.5 3.2 2.2 1.7 2.0 4.4 2.6 1.8 2.2 1.0 5.3 3.8 2.4 1.5 1.5 10.9 4.3 4.0 1.7 1.9 2.9 2.0 2.4 2.1 2.7 4.3 2.8 2.5 3.0 2.9 3.5 3.2 2.2 2.1 2.0 4.6 3.6 2.6 2.6 2.6 5.4 8.1 3.0 1.8 2.8 6.5 7.9 5.8 6.9 5.2 8.8 8.3 6.1 7.7 4.6 Unemployment 1960-9 1970-9 1980-9 1990-9 2000–5 1.5 3.7 9.0 10.6 9.2 0.9 2.3 5.9 7.7 8.9 5.1 6.4 9.5 10.4 9.0 1.3 1.7 2.5 3.7 5.0 2.2 4.5 10.0 8.1 5.1 4.1 6.1 7.2 5.8 5.3 2.5 4.0 9.3 9.2 7.9 2.5 4.3 7.3 6.9 6.7 n/a n/a n/a 9.3 10.5 n/a n/a 6.2 3.4 3.5 n/a n/a 3.6 2.8 3.8 Inflation 1960-9 1970-9 1980-9 1990-9 2000–5 4.2 9.4 7.3 2.0 1.8 3.2 5.0 2.9 2.2 1.4 4.4 13.9 11.2 4.7 2.7 4.9 9.0 2.5 0.8 –1.3 4.1 13.0 7.4 3.9 1.8 2.8 6.8 5.5 2.4 2.2 3.7 10.3 7.4 3.3 2.1 3.1 9.2 8.9 4.4 2.3 46.1 30.6 332.2 847.0 7.1 –0.3 7.3 2.2 3.6 1.6 1.1 5.9 2.5 1.9 1.0.

Economic growth 20 15 10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2 Year ••e—South Africa 9 2010 2011 2012 Brazil.

Ghana – Inflation.

Ghana –GDP growth (% annual).

Unemployment -% of total laboure force (ILO modeled estimates).

Ghana – Exchange rate (LCU/$) period average.

THE SCOPE OF MACROECONOMICS • Microeconomics and macroeconomics • The major macroeconomic issues • economic growth • unemployment • inflation • balance of payments and exchange rates • Government macroeconomic policy.

THE SCOPE OF MACROECONOMICS • Microeconomics and macroeconomics • The major macroeconomic issues • economic growth • unemployment • inflation • balance of payments and exchange rates • Government macroeconomic policy • choosing between macroeconomic theories.

THE SCOPE OF MACROECONOMICS • Microeconomics and macroeconomics • The major macroeconomic issues • economic growth • unemployment • inflation • balance of payments and exchange rates • Government macroeconomic policy • choosing between macroeconomic theories • choosing the order of priorities.

•Societies face trade-offs between economic objectives. •The goal of faster growth may conflict with that of greater equality; •The goal of lower unemployment may conflict with that of lower inflation. •The existence of trade-offs means that policy-makers must make choices.

THE CIRCULAR FLOW OF INCOME •Aggregate demand (AD). This is the total spending on goods and services made within the country. •This spending consists of four elements. AD = C + I + G + X − M where, C= Household Consumption I =Investment G=Government expenditure X=Exports M=Imports.

The National Economy The Circular Flow of Income.

National Income Accounting and The Circular Flow of Income • National Income Accounting is the measurement of the annual output and income flows of an economy. • It provides basis for assessing the economic performance, for designing public policy and for understanding how all the sectors of an economy interact..

National Income Accounting and The Circular Flow of Income • It is an accounting framework used in measuring current economic activity in an economy over a period of time. • The various approaches for measuring national income and their links can be explained by the Circular Flow of Income Model..

The Circular Flow of Income.

The Circular Flow of Income Figure: Circular Flow – Two – Sector Closed Economy Incomes to factors of Production Costs Factor services Factor market Goods market Receipts Goods and Services Household expenditure.

Factor payments Consumption of domestically produced goods and services (Cd) The circular flow of income Firms Households.

THE CIRCULAR FLOW OF INCOME • Withdrawals (W): • Only part of the incomes received by households will be spent on the goods and services of domestic firms. The remainder will be withdrawn from the inner flow. • Likewise only part of the incomes generated by firms will be paid to the households. The remainder of this will also be withdrawn. • There are three forms of withdraws (or‘leakages’). • Net savings (S): Saving is income that households choose not to spend but to put aside for the future. Savings are normally deposited in financial institutions such as banks.

THE CIRCULAR FLOW OF INCOME • Withdrawals (W): • Net taxes (T): When people pay taxes (to either central or local government), this represents a withdrawal of money from the inner flow • Import expenditure (M): Income spent on imported goods and services, or on goods and services using imported components..

THE CIRCULAR FLOW OF INCOME • Injections (J) • Only part of the demand for firms’ output arises from consumers’ expenditure. • The remainder comes from other sources outside the inner flow. These additional components of aggregate demand are known as injections • There are three types of injections. • Investment (I): This is the money that firms spend after obtaining it from various financial institutions – either past savings or loans, or through a new issue of shares.

THE CIRCULAR FLOW OF INCOME • Injections (J) • Government expenditure (G): When the government spends money on goods and services produced by firms, this counts as an injection • Export expenditure (E): Money flows into the circular flow from abroad when residents abroad buy our exports of goods and services.

Factor payments Consumption of domestically produced goods and services (Cd) Investment ( I ) Government expenditure ( G ) Export expenditure ( X ) BANKS, etc Net saving (S) GOV. Net taxes ( T ) ABROAD Import expenditure ( M ) The circular flow of income WITHDRAWALS INJECTIONS.

THE CIRCULAR FLOW OF INCOME • The links between injections and withdrawals • There are indirect links between saving and investment, taxation and government expenditure, and imports and exports, via financial institutions, the government (central and local) and foreign countries respectively. • Example: If more money is saved (S), there will be more available for banks and other financial institutions to lend out (I)..

THE CIRCULAR FLOW OF INCOME • The links between them (Example) • If tax receipts are higher (T), the government may be more keen to increase its expenditure (G). • If imports increase (M), incomes of people abroad will increase, which will enable them to purchase more of our exports (X)..

The circular flow and the four macroeconomic objectives • However, Planned injections (J) may not equal planned withdrawals (W). • If injections exceed withdrawals, the level of expenditure will rise and AD will rise • Consequence on macroeconomic objectives • Unemployment will fall • Inflation will tend to rise • The exports and imports part of the balance of payments will tend to deteriorate • There will be economic growth.

Equilibrium in the circular flow • When injections do not equal withdrawals, a state of disequilibrium will exist • This will set in train a process to bring the economy back to a state of equilibrium where injections are equal to withdrawals. • Assume injections exceeds withdrawals : • National income will increase • People will save more (S), pay more taxes (T) and buy more imports (M). In other words, withdrawals will rise. • This will continue until they have risen to equal injections.

The National Economy Measuring National Income.

MEASURING NATIONAL INCOME • The three ways of measuring GDP • Gross domestic product (GDP): The value of output produced within the country over a 12-month period. •the product method •the income method •the expenditure method.

The circular flow of national income and expenditure.

The circular flow of national income and expenditure (1) Production (2) Incomes (3) Expenditure.

MEASURING NATIONAL INCOME • The product (Output) method: This is the market value of final goods and services produced by countries’ own factors of production within a given period. • That is adding up the monetary value of the physical goods and services in an economy within a given period, usually within a year. • The final total output is called National Product of Output/GDP..

MEASURING NATIONAL INCOME • The output approach involves adding up the market value of the total output (goods and services) of all firms in the various sectors of the economy (agriculture, mining, manufacturing, services, etc) in a year. • This yields the GDP at market price.

MEASURING NATIONAL INCOME • The product (Output) method: Stages of production Value of output (Cedis) Cost of intermediate goods (Cedis) Gross Value Added (GVA) (Cedis) Farmer sells cassava 8,000 0 8,000 Miller turning cassava to cassava dough 11,000 8,000 3,000 Woman turning dough to gari 20,000 11,000 9,000 Gari delivered to retailer 30,000 20,000 10,000 Total 69,000 39,000 30,000.

MEASURING NATIONAL INCOME • The product (Output) method • Net Factor Income from abroad: The difference between income earned by foreigners in the domestic country and income earned by the citizens residing abroad) • GDP at market prices + Net Factor Income from abroad = Gross National Product (GNP) at market prices. • GNP at market prices – Indirect taxes + subsidies = GNP at factor cost. • GNP at factor cost – Depreciation = Net National Product (NNP) at factor cost..

MEASURING NATIONAL INCOME • Problems of the product (Output) method • The problem of double or multiple counting • Non-marketed activities • Underground activities • Poor Statistics • The valuation of public services.

MEASURING NATIONAL INCOME • The Income method/approach • The National Income is arrived at by adding up all the money values of incomes earned (wages, rent, dividend, interest etc) by the factors of production employed in producing the output in an economy within a specified period of time like one year • There are four factors of production. These are labour, land, capital and entrepreneurship..

MEASURING NATIONAL INCOME • The Income method/approach • Wages and salaries are paid to labour; • Rent and interest are paid to land and capital respectively and profit o entrepreneurship. • If all remunerations to factors of production are added up, the value should be equal to the total expenditure on total output..

MEASURING NATIONAL INCOME •The Expenditure method/approach • This approach measures the total expenditure needed to purchase output produced in the economy within a year. • It is the expenditure of households, firms and government within a year. • Total or Aggregate expenditure (AE) therefore is the sum of consumption expenditure on final goods and services and net exports (Exports minus Imports)..

MEASURING NATIONAL INCOME • The Expenditure method/approach • That is: AE = C + I + G + (X − M) where, C= Household Consumption I =Investment G=Government expenditure X=Exports M=Imports.