SSC 260 : Introduction to Social Sciences : Economic Section Jaruwan Chontanawat Topic 2: Economic force in Daily life (II) : Introduction to Macroeconomics
Outlines: Overview of Macroeconomics & Development of Macroeconomics Key concepts of Macroeconomics Aggregate Supply and Demand Measuring economic activities
Overview of Macroeconomics Macroeconomics is the study of the behaviour of the economy as a whole. It examines the force that affect many firms, consumers, and workers at the same time. Two central themes: Business cycle: the short-term fluctuations in output, employment, and prices. Economic growth: the longer term trends in output and living standards.
Development of Macroeconomics Great Depression during 20 th century. John Maynard Keyns developed his revolutionary theory which help explain the forces producing economic fluctuation and suggested how governments can control the worst excesses of business cycle. Choice of macroeconomic policies those affecting the money supply, taxes, and the government spending.
Thus, by adopting macroeconomic policies, a nation can : speed or slow its economic growth. trime the excess of price inflation or unemployment from business cycle. take measure to deal with imbalances that arise in foreign trade or international finance.
Key concepts of Macroeconomics The birth of Macroeconomics 1930s great depression, World War II 1946 Employment Act, Central economies questions : 1. Why do output and employment sometimes fall, and how can employment be reduced? All market economies show pattern of expansion and contraction 1990-1991:last economic downturn in the US- production fell, people lost their job. One key goal of macroeconomic policy is to use monetary and fiscal policy to reduce business-cycle downturns and unemployment.
2. What are the sources of price inflation, and how can it be kept under control? A market economy uses price as a yardstick to measure economic values and conduct business. During periods of rapidly rising prices price inflation : people become confused, spend much - lead to economic inefficiency. Macroeconomic policy focus more on price stability Some countries fail to maintain inflation Russia and many Latin American and LDCs experienced inflation rate of 50, 100, 1000 % per year in the 1980s and early 1990s. Some have succeeded US was able to keep inflation. Macroeconomics can suggest the proper role of monetary and fiscal policies, of exchange-rate systems, and of an independent central bank in containing inflation.
3. How can a nation increase its rate of economic growth? Economic growth refers to growth in the productive potential of an economy. In other words, An economy s productive potential is the central factor in determining the growth in its real wages and living standards. After WW II, -rapid economic growth in Asian countries e.g. Japan, South Korea, Taiwan. A few countries e.g. Africa have suffered from the declining of per capita output and living standards over the last two decades. Nations want to know the ingredients in a successful growth recipe. The key factors in rapid economic growth are the predominance of free markets, high rates of saving and investment, an outwardly oriented trade policy, and honest government with strong property rights.
Objective and instruments of Macroeconomics major goals and instruments of macroeconomic policy. Objectives : I.Output: high level and rapid growth of output. II. Employment: high level of employment with low involuntary unemployment. III. Price-level stability Instruments Monetary policy: Controlling the money supply to determine interest rates. Fiscal policy: Government expenditure, Taxation.
I. Output The ultimate objective of economic activity is to provide the goods and services that the population desires. The popular measure of the total output in an economy is the Gross domestic product (GDP). GDP is the measure of the market value of all final goods and services cars, beer, health care etc in a country during a year. Two way to measure GDP: Nominal GDP is measured in actual market prices. Real GDP is measure in constant price. Despite short-term fluctuations seen in business cycles, advance economies generally exhibit a steady long-term growth in real GDP and an improvement in living standards: this process is known as economic growth.
Potential GDP (high-employment level of output) represents the maximum amount the economy can produce while maintaining price stability. When an economy is operating at its potential, unemployment is low and production is high. Potential output is determined by the economy's productive capacity, which depends upon the inputs available (capital,labor, land, etc). Potential GDP tends to grow slowly and steadily while actual GDP is subject to large business-cycle swings. Thus economic policies can affect actual output quickly but affect potential output slowly over a number of years. During business downturn, actual GDP is below its potential and unemployment rises. Economic downturns are called a recessions when real output declines for a year or two. A severe downturn is called depression. Output can be temporarily above potential output during booms and wartime as capacity limits are strained, but the high utilization rates bring rising inflation and are usually brought to an end by monetary or fiscal policy.
II. High Employment & Low Employment Low employment is one of macroeconomic objective. Unemployment rate measures the fraction of the labor force that is looking for work but cannot find work. Unemployment rate tend to reflect the state of business cycle: - when output is falling, the demand for labor falls and the unemployment rate rises.
III.Stable Prices The most common price measure is the consumer price index, known as CPI. CPI measures the cost of a basket of goods bought by the average urban consumer. It represents the overall price level. The rate of inflation denotes the rate of growth or decline of the price level from one year to the next.
A deflation occurs when prices decline. (or rate of inflation is negative) Hyperinflation means a rise in the price level of a thousand or a million percent a year Germany in the 1920s, Brazil in the 1980s, Russia in the 1990s. Price stability is important High inflation imposes many costs Deflation is also costly
The tool of macroeconomic policy Suppose you are chief economist advising the government. Unemployment is rising and GDP is falling, productivity growth decline, balance of payment crisis with a large trade deficit and an attack on the currently, What policy will help reduce inflation or unemployment, speed economic growth, or correct a trade imbalance? Two main policies : Fiscal policy Monetary policy
Fiscal Policy Fiscal policy consists of government expenditures and taxation. Government expenditure : affect the overall level of spending in the economy (GDP). Spending on goods and services Government transfer payments Taxation Affect people s income (spending and saving) Affect the price of goods and factors of production and therefore affect incentives and behavior.
Monetary policy Monetary policy, conducted by the central bank, determines the money supply. Money supply consists of the means of exchange or method of payment currency, cheque account. Changes in the money supply move interest rates up or down and affect spending in sectors e.g. business investment, housing, and net export. Ex. A policy of tight money in the US raised interest rate, slow economic growth, and raise unemployment in 1979-1982. Then from 1982-2000: focus on economic expansion policy.
International Linkages The international economy is an linkage of trading and financial connection among countries. When the international economic system runs smoothly, it contributes to rapid economic growth. When trading systems breakdown, production and incomes suffer throughout the world. Countries therefore consider the impacts of trade policies and international financial policies on their domestic objectives of output, employment and price stability.
Aggregate Supply and Demand Aggregate demand (AD) consist of the total spending in an economy by households, businesses, governments and foreigner. AD represents what everyone in the economy would buy at different agg price levels. It represents the total output that would be willingly bought at each price level given other factors affecting demand. Aggregate supply (AS) describes how much output would willingly produced and sell given prices, cost and market conditions. AS refers to the total quantity of goods and services that the nation s business willingly produce and sell in a given period.
Equilibrium A macro economic equilibrium is a combination of overall price and quantity at which buyers and sellers are satisfied with their purchases, sales and prices. The overall macroeconomic equilibrium, determining both aggregate price and output, comes where the AS and AD curves intersect.
Measuring Economic Activities :Application GDP GNP National Income Income per Capita
GDP: Gross domestic product Total value of products and services that are produced in Thailand regardless of who are the producers.
GDP: Calculation Assume that in 2006 o Mr.A produced 2 T-Shirts/ 100 bath each = 200 bath o Mr.B provided massage service = 300 bath o Mr.Nobita produced 3 Doraemon robots = 3,000,000 baht in Thailand/ 1,000,000 bath each If these 3 people are the total population of Thailand, Thai GDP would be calculated as; o Mr.A = 200 bath o Mr.B = 300 bath o Mr.Nobita = 3,000,000 baht o Thai GDP = 3,000,500 baht
Can GDP identify economic growth? GDP include Japanese products that are produced in Thailand?
GNP: Gross national product Total value of products and services that are produced by Thai people.
GDP vs. GNP GDP concern Border. GNP concern Producer. ด ดแปลงจากบทความของดร. บ ญเสร ม บ ญเจร ญผล
GNP: Calculation Assume that in 2006 o Mr.A (Thai) produced 2 T-Shirts/ 100 bath each = 200 bath o Mr.B (Thai) provided massage service = 300 bath o Mr.Nobita produced 3 Doraemon robots = 3,000,000 baht in Thailand/ 1,000,000 bath each o Mr.C (Thai) clean bathroom in whith house earn = 10 baht o Ms.D (Thai) work as a chef in Suddum house = 20 baht GNP concern producer not border o GNP: 200+300+10+20 = 530 baht o GDP: 200+300+3,000,000 = 3,000,500 baht ด ดแปลงจากบทความของดร. บ ญเสร ม บ ญเจร ญผล
Question Is Thai GNP less than GDP? Yes; Foreign investor come in take profit and move money back to their home countries Foreigner who work in Thailand usually earn higher income than Thais who work aboard. Rich countries have GNP more than GDP ด ดแปลงจากบทความของดร. บ ญเสร ม บ ญเจร ญผล
Two approaches to calculate GDP GDP from the Product side GDP from the Cost side
The circle flow of goods and incomes : how consumers and producers interact to determine prices and quantities for both inputs and outputs Goods and services Firms Expenditure Wages, rent, Dividends, etc. Household Land,labour, capital goods
GDP from the Product Side Measure the flow of final products To avoid double counting, we include only final goods in GDP and to exclude the intermediate goods that are used up in making the final goods. We are measuring the value added at each stage. It is the sum of 4 major expenditure items; C : Personal consumption expenditure on goods and services. I : Gross private domestic investment G : Government consumption expenditure and gross investment X-M : Net exports of goods and services (or exports minus import)
GDP from the cost side (income approach) Measure the flow of earning in the economy. The sum of wage, rent, interest, profit.
National Income Gross income of Thai population Income in Economics are; Wage Rent Interest Profit ด ดแปลงจากบทความของดร. บ ญเสร ม บ ญเจร ญผล
National Income How to calculate for National Income? Sum of incomes of all Thai population Example. Mr. A make Mr. B earn Mr. C earn Mr. D earn Mr. E earn 100,000,000 baht a year, Thai national income: 100,005,100 Baht 5,000 baht a year 55 baht a year 40 baht a year 5 baht a year ด ดแปลงจากบทความของดร. บ ญเสร ม บ ญเจร ญผล
Income per Capita Average income of people Calculate by dividing the national income with total population in that country From previous example, National income Total population = 100, 005,100 Baht = 5 people Can be calculated as follow: (100,005,100 5) Thai income per capita = 20,001,020 Baht/Year ด ดแปลงจากบทความของดร. บ ญเสร ม บ ญเจร ญผล
Question Can income per capita identify that Thais are rich or poor? From previous example: Thai income per capita 20,001,020 Baht/Year While Mr. C earn 55 Baht/Year Mr. D earn 40 Baht/Year Mr. E earn 5 Baht/Year No, if the gap of income of rich and poor is still a big different.
Acknowledgement Aj. Panalert Siriwong
Thank you