Macroeconomics CH2

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Macroeconomics,Macroeconomics PPT,Macroeconomics university of Palestine Dr. Moran Ra jab


  • 1. Chapter 2Chapter 2 Gross Domestic IncomeGross Domestic Income (GDI) and(GDI) and Gross Domestic ProductGross Domestic Product (GDP(GDP((
  • 2. The four-sector circular flow model describesThe four-sector circular flow model describes the operation of the economy and the linkagesthe operation of the economy and the linkages between the main sectors in the economy.between the main sectors in the economy. The four -sector model is based on dividing theThe four -sector model is based on dividing the economy into four sectors as follow;economy into four sectors as follow; 1. Individuals1. Individuals (house holds)(house holds) CC 2. Businesses2. Businesses II 3. Government3. Government GG 4. International Trade4. International Trade ( X-M )( X-M )
  • 3. The circular flow of incomeThe circular flow of income:: The circular flow of income: implies that every dollar spent by someone for purchasing is considered an incomeincome for someone else; This income is also representing the value of the good or service. Therefore, a dollar of expenditurea dollar of expenditure = a dollar of income = value of the good or service = production value.
  • 4. Illustration of the circular flowIllustration of the circular flow of incomeof income:: To illustrate the circular flow of income, we assume initially that we have a simple economy that consists of two sectorstwo sectors; Business sector and the individuals sector assuming that all the individuals sector income is spent on consumptions goods and services the figure below illustrates this concept where there is a cash flow between the individuals
  • 5. Sum of all finalSum of all final goods and servicesgoods and services = GDP= GDP BusinessesBusinesses II Production ElementProduction Element returns = nationalreturns = national incomeincome HouseholdHousehold IndividualsIndividuals CC Wages + salaries+ capital return+ rentsWages + salaries+ capital return+ rents Final goods and services 2 4 3 Circular flow for income in two sectors economyCircular flow for income in two sectors economy
  • 6. Explanation of sectors processesExplanation of sectors processes:: 1. The individuals sector supplies the business sector with all production factors such as labor , capital and natural resources 2. The business sector uses the production factors in the production process, so they produce goods and services which the individuals sector use for consumption.
  • 7. 3. For business sector to receive the production elements services from the individual sector, the individual sector receives returns, these returns are represented in wages, salaraies, return of capital, retrun on investment, land rental (natural resources). * All of these retrurns or incomes are called local income.local income.
  • 8. 4. The individuals sector buys its needs and services that the business sector produce and pays in reurn for these needs an income (local income), the sum of these final goods and services is represented by the Gross Domestic Product GDP and this is illustrated in the previous figure and also illustrates the total expenditure that consists of the consumer spending for the individual sector in this simple economy.
  • 9. Therefore, we have a cash flow from once sector that is met with a cash flow with the same value from another sector. GDP from goods and services that were produced by the business sector through the production elements that had income, which means the production has generated income, these incomes have been spent on the GDP from its different goods and services as illustrated below.
  • 10. To be more realistic, we have to take into account the other sectors of the macroeconomics such as the government sector and the external world (imports & exports). In addition to business sectors and individual sectors. This sictualr flow for income is illustrated by the new figure below. In this figure we notice, that the individual sector does not spend its income on consumption.
  • 11. The channels of Individual SectorThe channels of Individual Sector incomeincome A- Goods and services consumption which means the Private Consumption Expenditure and its value goes directly to the business sector (arrow 1)
  • 12. B-B- SavingsSavings:: it remaining unspent part of the income for the purpose of spending in the future or may be invested, therefore, this savings would find its way to the financial market (banks, saving institutions, etc.) whose task to gather all the savings and make it available for investors in the form of loans, that is used to purchase investment goods, these goods represent part of 2 as illustrated ( arrow 1) GDP value goes to the business sectors.
  • 13. C. Net Taxes:C. Net Taxes: is the deductable part of the income that goes directly to government to finance its expenditure on goods and services purchased from the business sectors as in (arrow 3). Since the government pays salaraies and payments for seniors and retired people (social security payments or pension) those represent part of the family sector. * To net taxes is calculated by deducting the social security payments from the taxes paid to government
  • 14. D- Imports:D- Imports: the individual sector finally imports the goods and services from outside because they are available nationally and in return, the business sector exports goods and services that are produced nationally
  • 15. Cash flow for a 4 sectors economy (individuals,Cash flow for a 4 sectors economy (individuals, Business, governmental, internationalBusiness, governmental, international(( National income (wages, salaries,National income (wages, salaries, returns, capital, rentsreturns, capital, rents(( Household SectorHousehold Sector CC Business SectorBusiness Sector II FinancialFinancial MarketMarket Government Sector GGovernment Sector G International Trade X - MInternational Trade X - M Private Consumptive Spending (1Private Consumptive Spending (1(( SavingSavingInvestment (2Investment (2(( Net taxesNet taxes Government consumptiveGovernment consumptive spending (3spending (3(( Imports (3Imports (3((Exports (4Exports (4((
  • 16. We notice from the above circular cash flow that the domestic products main spending was by the domestic income which the individual sectors gets Gross Doemstic Income (GDI) = Gross Domestic Product (GDP) Thereofer, we can deduce the meaning and concept of the following GDP, GDI and Total Expecditure.
  • 17. Gross Domestic Product (GDP(: is the sum of all final goods and services that are produced nationally in specific period of time usually (one year)
  • 18. Gross Doemstic Income (GDI(: is the sum of production elements that contributed in the production process (contributed in the GDP) in specific period of time usually (one year). Total Expenditure:Total Expenditure: is the total demand and is represented by the private consumption expenditure, investment consumption, government expenditure, net difference between (exports-imports) in specific period of time usually (one year).
  • 19. Gross Domestic Product (GDPGross Domestic Product (GDP(( Is measured in three different approaches 1. Product 2. Income 3. Expenditure
  • 20. Product ApproachProduct Approach:: This is divided into two methods:
  • 21. A) The final value approach: the country sums up all what has been produced from a final goods and services in a monetary value in a specific period of time usually one year and the sum is the domestic product. Primary and medium goods and services are not included in this GDP Calculation, this approach does just account for the final goods and services. The final good is the one that is purchased for a potential use not for sale or for waste.
  • 22. B) Value added method: Value added =Value added = Production value production needs at every stage of the production stages
  • 23. ExampleExample Product Production Stages Additional Value Wheat 70 70 Flour 130 60 Bread 200 70 We notice that the value 400 200