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Firms
Consumption of
Factor domestically
payments produced goods
and services (Cd)
Households
The Circular Flow of Income
■ Withdrawals
✜ net saving
✜ net taxes
✜ import expenditure
■ Injections
✜ investment
✜ government expenditure
✜ export expenditure
The circular flow of income
INJECTIONS
Export
expenditure (X)
Investment (I)
Government
Consumption of expenditure (G)
Factor domestically
BANKS, etc GOV. ABROAD
payments produced goods
and services (Cd)
Import
Net expenditure (M)
Net taxes (T)
saving (S)
WITHDRAWALS
The Circular Flow of Income
INJECTIONS
Export
expenditure (X)
Investment (I)
Government
Consumption of expenditure (G)
Factor domestically
BANKS, etc GOV. ABROAD
payments produced goods
and services (Cd)
Import
Net expenditure (M)
Net taxes (T)
saving (S)
WITHDRAWALS
Measuring national income
■ GDP: the measure of national income
■ Methods of measuring GDP
✜ the product approach
✜ the income approach
✜ the expenditure approach
The circular flow of national income and expenditure
The circular flow of national income and expenditure
(1) Production
Potential output
National output
Actual
output
O
Time
Growth and the Business Cycle
Potential output
National output
3
4
2 Actual
3
output
4
2 1
O
Time
Growth and the Business Cycle
Potential output
Trend
National output
output
Actual
output
O
Time
Growth and the Business Cycle
■ Growth in actual and potential growth
■ Economic growth and the business cycle
Growth and the Business Cycle
■ Growth in actual and potential growth
■ Economic growth and the business cycle
✜ fluctuations in actual growth
✜ the phases of the business cycle
✜ long-term output trend
✜ the business cycle in practice
✦ the irregularity of the cycle
✦ the length of the phases
✦ the magnitude of the phases
Growth and the Business Cycle
7
6
5
4
3
2
1
0
-1
-2
-3
1970 1975 1980 1985 1990 1995 2000
Growth and the Business Cycle
■ Causes of potential growth
✜ increases in the quantity of factors
✦ capital
✦ labour
✦ land and raw materials
✦ the problem of diminishing returns
AD
National output
Aggregate Demand and Supply
AD
National output
Aggregate Demand and Supply
AD
National output
Aggregate Demand and Supply
AD
National output
Aggregate Demand and Supply
■ The aggregate demand curve
✜ Why aggregate demand curves slope
downwards
✦ import effect
✦ interest-rate effect
✦ savings effect
AS
Price level
AD
National output
Aggregate Demand and Supply
■ The aggregate demand curve
✜ Why aggregate demand curves slope
downwards
✦ import effect
✦ interest-rate effect
✦ savings effect
AS
Price level
AD
National output
Aggregate Demand and Supply
■ The aggregate demand curve
✜ Why aggregate demand curves slope
downwards
✦ import effect
✦ interest-rate effect
✦ savings effect
■ The aggregate supply curve
✜ Why aggregate supply curves generally
slope upwards
■ Equilibrium
Aggregate demand and aggregate supply
AS
Price level
Pe
AD
National output
Aggregate demand and aggregate supply
AS
Price level
Pe
b a
P2
AD
National output
Aggregate Demand and Supply
■ The aggregate demand curve
✜ Why aggregate demand curves slope
downwards
✦ import effect
✦ interest-rate effect
✦ savings effect