Slide1: 9 The Economy and Business Activity


Macroeconomic Objectives: Macroeconomic Objectives Microeconomics and macroeconomics The major macroeconomic issues economic growth unemployment inflation balance of payments and exchange rates Government macroeconomic policy controlling various intermediate variables interest rates, money supply, taxes, government expenditure, etc.


The Circular Flow of Income: The Circular Flow of Income The inner flow


Slide4: The circular flow of income Firms Households


The Circular Flow of Income: The Circular Flow of Income Withdrawals net saving (S) net taxes (T) import expenditure (M) Injections investment (I) government expenditure (G) export expenditure (X)


Slide6: Factor payments Consumption of domestically produced goods and services (Cd) The circular flow of income WITHDRAWALS INJECTIONS


The Circular Flow of Income: The Circular Flow of Income The relationship between withdrawals and injections the links between them planned injections may not equal planned withdrawals effect of J > W effect of W > J equilibrium in the circular flow


Slide8: Factor payments Consumption of domestically produced goods and services (Cd) The circular flow of income WITHDRAWALS INJECTIONS


The Circular Flow of Income: The Circular Flow of Income The relationship between withdrawals and injections the links between them planned injections may not equal planned withdrawals effect of J > W effect of W > J equilibrium in the circular flow The circular flow and the four macroeconomic objectives


The Determination of Business Activity: The Determination of Business Activity The importance of aggregate demand effects of J > W effects of W > J Identifying the equilibrium level of GDP the 45o line diagram


Equilibrium GDP: O GDP (£bn) GDP = Cd + W Cd, E, W, J (£bn) Equilibrium GDP


The Determination of Business Activity: The Determination of Business Activity The importance of aggregate demand effects of J > W effects of W > J Identifying the equilibrium level of GDP the 45o line diagram the GDP and E lines


Equilibrium GDP: O GDP (£bn) GDP = Cd + W Cd, E, W, J (£bn) Equilibrium GDP


The Determination of Business Activity: The Determination of Business Activity The importance of aggregate demand effects of J > W effects of W > J Identifying the equilibrium level of GDP the 45o line diagram the GDP and E lines effects of E > GDP effects of GDP > E


Equilibrium GDP: O GDP (£bn) GDP = Cd + W Cd, E, W, J (£bn) GDP1 GDP2 Equilibrium GDP


The Determination of Business Activity: The Determination of Business Activity The importance of aggregate demand effects of J > W effects of W > J Identifying the equilibrium level of GDP the 45o line diagram the GDP and E lines effects of GDP > E effects of E > GDP finding the equilibrium point


Equilibrium GDP: O GDP (£bn) GDP = Cd + W Cd, E, W, J (£bn) GDP1 GDP2 GDPe Equilibrium GDP


The Determination of Business Activity: The Determination of Business Activity The multiplier the multiplier process definition of the multiplier GDP / J the marginal propensity to consume domestic goods and services mpcd = Cd / GDP


The multiplier: a rise in aggregate expenditure: O GDP (£bn) 100 160 100 120 160 Cd, E, W, J (£bn) The multiplier: a rise in aggregate expenditure


The Determination of Business Activity: The Determination of Business Activity The multiplier the multiplier process definition of the multiplier GDP / J the marginal propensity to consume domestic goods and services mpcd = Cd / GDP formula for the multiplier 1 / (1–mpcd)


The multiplier: a rise in aggregate expenditure: O GDP (£bn) 100 160 100 120 160 Cd, E, W, J (£bn) The multiplier: a rise in aggregate expenditure


The Business Cycle: The Business Cycle Growth in actual and potential output Economic growth & the business cycle fluctuations in actual growth the phases of the business cycle the upturn the expansion the peaking out the slowdown or recession


The business cycle: O National output Time 1 2 3 4 The business cycle


The Business Cycle: The Business Cycle Growth in actual and potential output Economic growth & the business cycle fluctuations in actual growth the phases of the business cycle the upturn the expansion the peaking out the slowdown or recession long-term output trend


The business cycle: O National output Time Potential output Actual output The business cycle


The Business Cycle: The Business Cycle Growth in actual and potential output Economic growth & the business cycle fluctuations in actual growth the phases of the business cycle the upturn the expansion the peaking out the slowdown or recession long-term output trend the business cycle in practice


The Business Cycle: The Business Cycle Growth in actual and potential output Economic growth & the business cycle fluctuations in actual growth the phases of the business cycle the upturn the expansion the peaking out the slowdown or recession long-term output trend the business cycle in practice the length of the phases


The Business Cycle: The Business Cycle Growth in actual and potential output Economic growth & the business cycle fluctuations in actual growth the phases of the business cycle the upturn the expansion the peaking out the slowdown or recession long-term output trend the business cycle in practice the length of the phases the magnitude of the phases


Growth rates in selected industrial countries: Annual growth rate (%) UK Growth rates in selected industrial countries


Growth rates in selected industrial countries: Annual growth rate (%) UK Growth rates in selected industrial countries


Growth rates in selected industrial countries: Annual growth rate (%) Growth rates in selected industrial countries UK EU15


Growth rates in selected industrial countries: Annual growth rate (%) Growth rates in selected industrial countries UK EU15


Growth rates in selected industrial countries: Annual growth rate (%) Growth rates in selected industrial countries UK EU15 USA


Growth rates in selected industrial countries: Annual growth rate (%) Growth rates in selected industrial countries UK EU15 USA


Growth rates in selected industrial countries: Annual growth rate (%) Growth rates in selected industrial countries UK EU15 Japan USA


Growth rates in selected industrial countries: Annual growth rate (%) Growth rates in selected industrial countries UK EU15 Japan USA


The Business Cycle: The Business Cycle Causes of cyclical fluctuations Why does AD change in the first place? Why do booms and recessions persist? time lags bandwagon effects the accelerator Why do booms and recessions end? ceilings and floors echo effects the accelerator random shocks changes in government policy


Money, Interest Rates and Business Activity: Money, Interest Rates and Business Activity The meaning of money narrow definitions of money (M0 in the UK) broad definitions of money (M4 in the UK) The supply of money banks and the creation of credit simple illustration


Slide39: Credit creation: Banks' original balance sheet


Slide40: Credit creation: Effect of a new deposit of £10bn


Slide41: Credit creation: Full effect of a new deposit of £10bn


Money, Interest Rates and Business Activity: Money, Interest Rates and Business Activity The meaning of money narrow definitions of money (M0 in the UK) broad definitions of money (M4 in the UK) The supply of money banks and the creation of credit simple illustration the deposits multiplier


Money, Interest Rates and Business Activity: Money, Interest Rates and Business Activity The meaning of money narrow definitions of money (M0 in the UK) broad definitions of money (M4 in the UK) The supply of money banks and the creation of credit simple illustration the deposits multiplier creation of credit: the real world


Money, Interest Rates and Business Activity: Money, Interest Rates and Business Activity The meaning of money narrow definitions of money (M0 in the UK) broad definitions of money (M4 in the UK) The supply of money banks and the creation of credit simple illustration the deposits multiplier creation of credit: the real world banks' liquidity ratio may vary


Money, Interest Rates and Business Activity: Money, Interest Rates and Business Activity The meaning of money narrow definitions of money (M0 in the UK) broad definitions of money (M4 in the UK) The supply of money banks and the creation of credit simple illustration the deposits multiplier creation of credit: the real world banks' liquidity ratio may vary banks respond to the demand for money


Money, Interest Rates and Business Activity: Causes of increases in money supply increased demand for money banks reduce liquidity ratio inflow of funds from abroad a public-sector deficit (PSNCR) depends on how it is financed from banking sector: money supply expands from outside the banking sector: money supply does not expand Money, Interest Rates and Business Activity


Money, Interest Rates and Business Activity: The demand for money reasons for holding money transactions and precautionary motive assets or speculative motive determinants of demand for money money national income speculation about future return on assets rate of interest Money, Interest Rates and Business Activity


Money, Interest Rates and Business Activity: Equilibrium rate of interest where demand for money equals supply Money, Interest Rates and Business Activity


Equilibrium in the money market: O Money Rate of interest re Equilibrium in the money market


Money, Interest Rates and Business Activity: Equilibrium rate of interest where demand for money equals supply if supply of money rises or demand for money falls, the rate of interest will fall Money, Interest Rates and Business Activity


Equilibrium in the money market: O Money Rate of interest re Equilibrium in the money market


Money, Interest Rates and Business Activity: Effects of changes in money supply on national income rise in money supply causes interest rate to fall fall in interest rate causes investment to rise rise in investment causes GDP to rise Determinants of the size of these effects Money, Interest Rates and Business Activity


Unemployment: Unemployment Measuring unemployment defining the unemployment rate claimant unemployment do claimant statistics give a true picture of unemployment? standardised unemployment (ILO/OECD) use of labour force surveys


Unemployment: Unemployment Unemployment and the labour market the aggregate demand and supply of labour


Aggregate demand and supply of labour: Aggregate demand and supply of labour O Average (real) wage rate No. of workers


Unemployment: Unemployment Unemployment and the labour market the aggregate demand and supply of labour equilibrium in the model


Aggregate demand and supply of labour: O Average (real) wage rate No. of workers We Aggregate demand and supply of labour


Unemployment: Unemployment Unemployment and the labour market the aggregate demand and supply of labour equilibrium in the model disequilibrium unemployment


Disequilibrium unemployment: O Average (real) wage rate No. of workers ASL ADL We W2 Disequilibrium unemployment


Unemployment: 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 O Average (real) wage rate No. of workers ADL We ASL e Qe


Equilibrium unemployment: Qe O Average (real) wage rate No. of workers ASL ADL We N e Equilibrium unemployment


Equilibrium and disequilibrium unemployment: Equilibrium and disequilibrium unemployment O Average (real) wage rate No. of workers ADL We e Qe ASL


Equilibrium and disequilibrium unemployment: O Average (real) wage rate No. of workers ASL ADL We W2 b a e Equilibrium and disequilibrium unemployment


Equilibrium and disequilibrium unemployment: O Average (real) wage rate No. of workers ASL ADL We W2 b a e N c Disequilibrium unemployment Equilibrium and disequilibrium unemployment


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


Unemployment: Unemployment Unemployment and the labour market the aggregate demand and supply of labour equilibrium in the model disequilibrium unemployment equilibrium unemployment Disequilibrium unemployment real-wage unemployment


Unemployment: Unemployment Unemployment and the labour market the aggregate demand and supply of labour equilibrium in the model disequilibrium unemployment equilibrium unemployment Disequilibrium unemployment real-wage unemployment demand-deficient (cyclical) unemployment


Unemployment rates in selected industrial countries: Annual growth rate (%) UK Unemployment rates in selected industrial countries


Unemployment rates in selected industrial countries: Annual growth rate (%) UK Unemployment rates in selected industrial countries


Unemployment rates in selected industrial countries: Annual growth rate (%) UK EU15 Unemployment rates in selected industrial countries


Unemployment rates in selected industrial countries: Annual growth rate (%) UK EU15 Unemployment rates in selected industrial countries


Unemployment rates in selected industrial countries: Annual growth rate (%) UK EU15 USA Unemployment rates in selected industrial countries


Unemployment rates in selected industrial countries: Annual growth rate (%) UK EU15 USA Unemployment rates in selected industrial countries


Unemployment rates in selected industrial countries: Annual growth rate (%) UK EU15 Japan USA Unemployment rates in selected industrial countries


Unemployment rates in selected industrial countries: Annual growth rate (%) UK EU15 Japan USA Unemployment rates in selected industrial countries


Unemployment: Unemployment Equilibrium unemployment frictional (search) unemployment structural unemployment changing pattern of demand technological unemployment regional unemployment seasonal unemployment


Inflation: Inflation Defining inflation consumer price inflation other categories of inflation Inflation in historical perspective low inflation in 1950s and 60s high inflation in 1970s and 80s low inflation since mid 1990s most developed countries gear monetary policy to achieving a low target rate of inflation


Inflation rates in selected industrial countries: Annual growth rate (%) UK Inflation rates in selected industrial countries


Inflation rates in selected industrial countries: Annual growth rate (%) UK Inflation rates in selected industrial countries


Inflation rates in selected industrial countries: Annual growth rate (%) UK EU15 Inflation rates in selected industrial countries


Inflation rates in selected industrial countries: Annual growth rate (%) UK EU15 Inflation rates in selected industrial countries


Inflation rates in selected industrial countries: Annual growth rate (%) UK EU15 USA Inflation rates in selected industrial countries


Inflation rates in selected industrial countries: Annual growth rate (%) UK EU15 USA Inflation rates in selected industrial countries


Inflation rates in selected industrial countries: Annual growth rate (%) UK EU15 Japan USA Inflation rates in selected industrial countries


Inflation rates in selected industrial countries: Annual growth rate (%) UK EU15 Japan USA Inflation rates in selected industrial countries


Inflation: Inflation Aggregate demand & supply and prices aggregate demand curve


Aggregate demand and aggregate supply: O Price level National output Aggregate demand and aggregate supply


Inflation: Inflation Aggregate demand & supply and prices aggregate demand curve why AD curves slope downwards


Inflation: Inflation Aggregate demand & supply and prices aggregate demand curve why AD curves slope downwards lower price level leads to fewer imports lower price level tends to cause interest rates to fall lower price level increases value of people's savings


Inflation: Inflation Aggregate demand & supply and prices aggregate demand curve why AD curves slope downwards lower price level leads to fewer imports lower price level tends to cause interest rates to fall lower price level increases value of people's savings aggregate supply curve


Aggregate demand and aggregate supply: O Price level National output Aggregate demand and aggregate supply


Inflation: Inflation Aggregate demand & supply and prices aggregate demand curve why AD curves slope downwards lower price level leads to fewer imports lower price level tends to cause interest rates to fall lower price level increases value of people's savings aggregate supply curve why AS curves generally slope upwards


Inflation: Inflation Aggregate demand & supply and prices aggregate demand curve why AD curves slope downwards lower price level leads to fewer imports lower price level tends to cause interest rates to fall lower price level increases value of people's savings aggregate supply curve why AS curves generally slope upwards equilibrium


Aggregate demand and aggregate supply: O Price level National output Pe Aggregate demand and aggregate supply


Aggregate demand and aggregate supply: O Price level National output AS AD Pe P2 Aggregate demand and aggregate supply


Inflation: Inflation Aggregate demand & supply and prices aggregate demand curve why AD curves slope downwards lower price level leads to fewer imports lower price level tends to cause interest rates to fall lower price level increases value of people's savings aggregate supply curve why AS curves generally slope upwards equilibrium shifts in AD and AS curves


Inflation: Inflation Causes of inflation demand pull


Demand-pull inflation: Demand-pull inflation O Price level National output AS AD1 P1 Q1


Demand-pull inflation: O Price level National output AS AD1 P1 Q1 AD2 Demand-pull inflation


Demand-pull inflation: O Price level National output AS AD1 P1 Q1 AD2 P2 Demand-pull inflation


Inflation: Inflation Causes of inflation demand pull cost push wage push profit push import-price push


Cost-push inflation: Cost-push inflation O Price level National output AS1 AD P1 Q1


Cost-push inflation: O Price level National output AS1 AD P1 Q1 AS2 Cost-push inflation


Cost-push inflation: O Price level National output AS1 AD P1 Q1 AS2 P2 Cost-push inflation


Inflation: Inflation Causes 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 inflation: The interaction of demand-pull and cost-push inflation O Price level National output AS1 AD1 P1


The interaction of demand-pull and cost-push inflation: O Price level National output AS1 AD1 P1 AS2 AD2 The interaction of demand-pull and cost-push inflation


The interaction of demand-pull and cost-push inflation: O Price level National output AS1 AD1 P1 AD2 P2 AS3 AD3 AS2 The interaction of demand-pull and cost-push inflation


Inflation: Inflation Causes of inflation demand pull cost push wage push profit push import-price push expectations and inflation


Inflation: Inflation Causes of inflation demand pull cost push wage push profit push import-price push expectations and inflation Policies to tackle inflation


Inflation: Inflation Causes of inflation demand pull cost push wage push profit push import-price push expectations and inflation Policies to tackle inflation demand-side policies


Inflation: Inflation Causes of inflation demand pull cost push wage push profit push import-price push expectations and inflation Policies to tackle inflation demand-side policies supply-side policies