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LECTURE NOTES
MACROECONOMIC
Course Instructor: Madiha Kamal
2
Total Marks 100
Mid Term 30
final 45
Books:
Mankiw Principles of Macroeconomics 4 Edition
Samuelson, N Economics 18th Edition
DEFINATION OF MACROECONOMICS 3
FULL EMPLOYMENT
The situation in which all available resources in the
economy are employed to produce goods and services Full
employment does not mean 100 percent of the working
labor force. There are always some people who are
voluntarily unemployed as a result of being dissatisfied with
their current jobs and resigning to find another job.
PRICE STABILITY
6
Most of the nation try to narrow the gap between the higher
income and the lower income groups. This is to ensure that all
people are equal in terms of the standard of living. One of the
method of achieving an equitable distribution of income is
taxation. When taxes are imposed, the higher income groups pay
a higher tax to the government.
9
Circular Flow of Economic Activity
The circular flow of income or circular flow is a model of the economy in which the major
exchanges are represented as flows of money, goods and services, etc. between economic
agents. The flows of money and goods exchanges in a closed circuit and correspond in value,
but run in the opposite direction. The circular flow analysis is the basis of national
accounts and hence of macroeconomics.
Two Sector Equilibrium
Three Sector Equilibrium
Four Sector Equilibrium
10
Model of the circular flow of income and expenditure
11
Three Sector Equilibrium
A modern monetary economy comprises a network of four sector economy these are:
Household sector
Firms or Producing sector
Government sector
Rest of the world sector.
Each of the above sectors receives some payments from the other in lieu of goods and services which makes a
regular flow of goods and physical services. Money facilitates such an exchange smoothly. A residual of each
market comes in capital market as saving which in turn is invested in firms and government sector. Technically
speaking, so long as lending is equal to the borrowing i.e. leakage is equal to injections, the circular flow will
continue indefinitely. However this job is done by financial institutions in the economy. We may incorporate
financial sector as a fifth sector.
The five sector model of the circular flow of income is a more realistic representation of the economy. Unlike the two
sector model where there are six assumptions the five sector circular flow relaxes all six assumptions. Since the
first assumption is relaxed there are three more sectors introduced
14
Introduction to National Income Accounts
The national Income Accounts are based on the idea that the amount of economic activity
that occurs during a period of time can be measured in term of
The amount of spending by the ultimate purchasers of output (The Expenditure Approach).
All three approaches give identical measurements of the amount of current economic
activity.
Expenditure or Output Approach to Measuring GDP
17
Personal Consumption Expenditures (C)
18
Real Personal Consumption Expenditures, 1985 - present
19
Gross Private Domestic Investment (I)
I=S
20
Real Gross Private Domestic Product, 1985 - present
21
Government Consumption Expenditures and Gross Investment (G)
22
Real Government Consumption Expenditures and Gross Investment, 1985 - present
23
Net Export Spending (X M)
24
Real Net Export Spending, 1985 - present
25
Gross Domestic Product and Its Components, 2007
VALUE IN BILLIONS OF
COMPONENT
DOLLARS (% OF GDP)
26
Earnings or Income Approach to Measuring GDP
27
National Income
29
National Income, continued
30
GDP and GNP
1. Gross Domestic Product - (GDP) the total value of all goods and
services produced within the borders of the United States (or country
under analysis).
Or
GDP is the nations expenditures on all FINAL goods and services
produced during the year at market prices.
2. Gross National Product - (GNP) the total value of all goods and
services produced by Americans regardless of whether in the United
States or overseas.