Homework
Macroeconomics
- Allows us to interpret articles by the media
- Allows us to develop economic literacy
Models
- A simplified view of reality that omits many of the complications of the real world in order to provide us with a clear picture of how something works
- The circular flow of income is a macroeconomic model that describes flows of resources, goods and services between the parts of the economy
- It divides the economy into its key sectors - households, firms, the financial sector, the government and overseas sector
Households and Firms
- We assume;
- There are only two sectors - households and firms
- Households are the owners of the productive resources and the buyer of final goods and services
- Households spend all their income with no saving
- There exist real flows and money flows
- Reminds us that markets are interdependent
- Product Market and Factor Market
Saving and Investment
- Relax assumption that households spend all their income with no saving
- The financial markets such as banks, credit unions and super funds make up the capital/finance market
- Saving represents a leakage from the model
- Investment is defined as a expenditure of firms on production equipment and machinery
The Government Sector
- Produces goods and services such as healthcare, education, welfare services and defence
- This is by purchasing products in the factor market; this is why gov. spending is an injection into firms
- Things such as welfare allowances are called transfer payments because they are provided without exchange of goods and services in return
Overseas Sector
- All households spend some of their income on goods and services imported from overseas.
- We relax the assumption that the economy is closed as we export and import through leakages and injections
Equilibrium
- 'One man's spending is another mans income'.
- $\Sigma O = \Sigma Y = \Sigma E$
- (output, income and expenditure respectively)
- This is known as equilibrium
- When these requirements are not met (what usually occurs in the real world), disequilibrium is achieved
GDP
- Defined as the total market value of all final goods and services produced in a country during a period of time (usually a year)
- Three ways in which it could be measured
- Income and earnings approach - income received is added
- Expenditure Approach - addition of all spending on goods and services
- Production approach - in which the value of all goods and services produced is calculated
Expenditure Approach