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The Level of Overall Economic Activity

Chapter 13 - A new Macro beginning
by

Daniel Broadley

on 11 November 2015

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Transcript of The Level of Overall Economic Activity

Budapest
San
Francisco
We have now completed the Micro SL sections of the IB course!
Congratulations!!
SL HL IB Economics
Chapter 13
Macroeconomics
Guess!
What is ’macroeconomics’ about?
What do you think?
How would you create jobs?
How would you help businesses?
What would you do with taxes?
Who would you give tax revenues to?
How would you stop prices from rising all the time?
How would you make sure Sweden’s economy is healthy?
If you could decide how Sweden was governed..
How would you create jobs?
How would you help businesses?
What would you do with taxes?
Who would you give tax revenues to?
How would you stop prices from rising all the time?
How would you make sure Sweden’s economy is healthy?
If you could decide how Sweden was governed..
By the end of this chapter you should be able to: (sec3.1)
List the 5 macro goals
Illustrate the circular flow diagram
Define & explain the difference between NNP, GNP, GDP (real & nominal)
Explain why & see the limitations when we use national income statistics
See more on Page 155
Macroeconimics
These are the basic variables that we manipulate to aid our understanding of the economy.
Economic Growth (steadt incease in national output)
Employment (low unemployment)
Price Stability (stable inflation)
External Stability (good BOP)
Income distribution (equitable distribution)
5 Macro Variables
.. the Circular Flow model?

What sectors where in the model?

What did it show to us?

Why do we use it?
Do you remember..
.. the Circular Flow model?

What sectors where in the model?

What did it show to us?

Why do we use it?
Do you remember..
Circular Flow – 2 sector model (fig 14.1)
Households don’t spend all their income, they SAVE it! (i.e. SAVINGS)
This means current consumption falls, and output will also have to fall.
Lower output means lower returns and income back to households.
Leakages - Savings
Firms so however have a source of income.
Firms can acces the financial institutions where money is saved and LOAN money for investment in their firms.
Injections - Investment
Households can also buy goods & services overseas.
These imports mean that income flows to other countries
Other nations’ firms recieve income from us.
Leakages - Imports
But don’t worry!
Overseas households also buy our exports
These sold exports bring income back to our economy and inject income back to our economy domestically
Injections - Export
Which other sector takes money from households and reallocates it to other households?
Taxes (leakage) & Govt spending (injection)
Transfer payments are not included in this diagram – pensions, unemployment benefits & child allowance (as it is not output based)
What else do we need to consider?
We can draw some conclusions from this:
Where Leakages (S, M, T) = Injections (I, X, G) we have equilibrium
(savings + imports + taxes) = (investment + exports + govt spending)
Conclusions
Where leakages RISE in relation to Injections we have falling National Output and less income circulating

Where Injections RISE more than leakages we have rising national output to a new equibrium
Conclusions cont.
The Output Method – output of goods & services by sector
The Income Method – Measures the incomes earned in the economy
The expenditure Method – Spending on G&S in the sectors
GDP= C + I + G + (x-M)
Measuring National Income
Workpoint 13.1
Read & make your notes on GDP & GNP (pages 160-162)
Use your notes and return to your case country from the beginning of the course (the one with the low HDI)
Find the relevent measurements of national income for your case country. i.e GDP, GDP per capita etc.
Remember to save all the work you do for your case country for the last section of this course!
Your Turn
GDP – the total value of all final goods and services produced in an economy in a year.
GNP – the total income that is earned by a country’s factors of production regardless of where the assets are located.
GDP & GNP
National Output =National Income=National Expenditure

Different measurements of the same economy

GNP=GDP + net property income from abroad

NNP = GNP-depreciation

Real GDP = Nominal GDP adjusted for inflation

GDP per capital = GDP divided by population size
Measuring National Income
What do you think are the limitations of the information you have found based on your case country?
Question
Inaccuracies – sources, time, projections
Unrecorded / under-recorded data. Informal markets – official stats v private work, hidden work in sectors, illegal work
External Costs – resource depletion, externalities
Quality of life – hours, holidays, happiness?
Composition of output – public & private sectors
Limitations of Data
The Business Cycle
The Business Cycle..
Peaks / booms
Highest levels of GDP
Inflation can be higher
Unemployment lowest point
high interest rates
Decreased govt spending
Troughs
Lower levels of GDP
Inflation is at low point
unemployment at high levels
Lower interest rates
Increased govt spending
Peaks & Troughs
Rising income
Rising imports
rising inflation
expensive imports
worsening BOP
Expansion
Rising income
Rising imports
rising inflation
expensive imports
worsening BOP
Expansion
lower incomes
lower import levels
falling inflation
cheaper exports
improving BOP
Contraction
Recession - 2 consecutive quarters of negative GDP growth
Govt try to regulate these figures to keep a steady long term growth rate.
The more erratic the swings the more speculative and damaging they can be for the economy.
The Level of Economic Activity
Help!
Measuring the Circular Flow
The Business Cycle
Full transcript