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Introduction to economics MEB435/MEBn5035
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Macroeconomics II
Vladan Hodulák
This powerpoint serves as a study material for the students of the course Introduction to economics
(MEB435/MEBn5035) at FSS MU in Fall 2019. Using this presentation for other purposes without
consent of the author is prohibited.

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Sectoral balances perspective
̶The most basic macroeconomics rule is that one person’s spending is another person’s income.
̶The sectoral balances approach helps us to understand the relations among the spending and income
balances of the households, firms, government, and foreign sectors of the economy.
̶The sectoral balances must sum to zero.
̶A flow is measured as a certain quantity that is spent per unit of time.
̶A stock is measured at a point in time and is the product of prior, relevant flows.
Introduction to economics MEB435/MEBn5035

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The Sectoral Balances View of the National Accounts
̶Identity – a formula that is true by definition
̶GDP ≡ C + I + G + (X – M)
̶When these components of spending are summed, they equal aggregate demand for goods and services
in a particular period.
̶Macroeconomic policy aims at influencing the individual components of GDP.
̶Net external income flow (FNI) - we have to add this to get the total sum of financial flows
between the domestic economy and the external sector.
̶GNP ≡ C + I + G + (X – M) + FNI
Introduction to economics MEB435/MEBn5035

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The Sectoral Balances View of the National Accounts
̶(GNP – C – T) – I ≡ (G – T) + (X – M + FNI)
̶(GNP – C – T) – I - overall saving of the private domestic sector or private domestic financial
balance.
̶(G – T) is the government financial balance.
̶(X – M + FNI) is the external financial balance or Current Account Balance (CAB)
̶The private domestic financial balance equals the sum of the government financial balance plus the
current account balance.
̶It is impossible for all sectors to accumulate net financial wealth by running surpluses.
̶
Introduction to economics MEB435/MEBn5035

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UK sectoral balances, 1997 to 2014
Introduction to economics MEB435/MEBn5035

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Important remarks
̶One’s financial asset is another’s financial liability.
̶Inside vs outside sector wealth.
̶Real assets
̶Examples of economic behavior (theory, causal relationships)
̶The response of consumption to a change in income is called the Marginal Propensity to Consume
(MPC). It is normally hypothesised that the MPC will be less than one, so that the residual of
disposable income not consumed will be positive. That constitutes saving.
̶Automatic stabilizers – net government expenditure higher when national income is lower and vice
versa.
̶Lower interest rates should lead to higher investment which should in turn increase output.
̶
Introduction to economics MEB435/MEBn5035

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Balance of payments
̶Accounting accord of all monetary transactions between a country and the rest of the world
̶The sum of all accounts has to be equal 0 by definition
̶Composition (IMF × USA!)
̶Current account (CA) – trade + factor income
̶Financial (capital) account (including the reserve account) – net change of ownership of
international assets
̶Balancing item (statistical errors)
̶Relations between individual accounts
̶Net international investment position
̶Accumulated CA, asset price changes, currency moves
̶
Introduction to economics MEB435/MEBn5035

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Source: The Czech National Bank
Introduction to economics MEB435/MEBn5035

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Net international investment position (% of GDP in 2014)
Switzerland
119,6
United States
-39,7
Japan
74,8
Slovakia
-70
Germany
36,4
Spain
-94,5
China
17,1
Ireland
-106,7
Russia
16,7
Portugal
-111,6
CZ
-35,6
Greece
-121,9
Source: IMF
Introduction to economics MEB435/MEBn5035

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Definujte zápatí - název prezentace / pracoviště
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Balance of payments adjustment
̶CA deficits and the household analogy
̶Most countries have to “earn” money from abroad to pay for imports and previously accumulated
debts
̶CA deficits and governments deficits and debts
̶Financial crises are often accompanied by prolonged CA deficits and are solved through and
adjustment process, often assisted by the IMF
̶Balancing mechanisms
̶Exchange rate adjustment
̶Internal prices adjustment
̶Various others (debt forgiving, war, emigration)
̶

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Definujte zápatí - název prezentace / pracoviště
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Inflation and its causes
̶Inflation, hyperinflation and deflation
̶Neoclassical theory – Quantity theory of money
̶M × V = P × Y
̶Cost push inflation
̶Distributional struggle over the share of GDP between labor and capital
̶Market structures and natural resources
̶Demand pull inflation
̶Economy operating at full capacity
̶