On the other hand… Macroeconomics is the study of how the economy operates as a whole – more than simply the sum of all markets – and impacts on all micro markets. Microeconomics is the study of individual markets – where households and firms make decisions – and the big questions of an economy are answered.
Macroeconomics… …answers questions like the following: u How does a country get rich? u Does rich mean better? u Why do prices keep rising, sometimes rapidly? u Why do we have unemployment? u Why do we have to import so much? u Why is it “too easy” to borrow money at times and very difficult at other times?
The Five Macroeconomic Goals Generally, governments aim at achieving: 1. sustainable real growth of income 2. general price stability (low inflation) 3. full employment (low unemployment) 4. favourable balance of payments 5. equitable distribution of income
Consumer Spending Firms Goods and Services Households Recall: the basic circular flow model Resources (4 FoP) Household Income = payments from firms (rent, wages, interest and profit)
Lessons from the 2 sector circular flow model Each real flow has a corresponding money flow that makes a market. Money only circulates to allow for real flows to function smoothly. An economy can be measured by either the income flow or the spending flow: But… Expenditure comes from more than households. And all household income is not spent.
BANKS, etc GOV. Investment (I) Government expenditure (G) Export receipts (X) Net saving (S) Direct taxes (T) Import payments (M) Overseas WITHDRAWALS INJECTIONS Consumption C = Y – S –T Income(Y) expenditure
8 Three measures of national income Expenditure the sum of expenditures in the economy Income the sum of incomes all factor incomes Output the sum of output (value added) produced in the economy All three approaches are should give you the same final figure for national income
Calculating national income by “The Expenditure Method” Total spending by all sectors: C + I + G + X-M = GDP = Y GDP is the market value of all reported final goods and services produced within a country in a given period of time.
The Components of GDP Consumption (C) : u The spending by the Households Sector on goods and services (less net i.t. (indirect taxes - subsidies) to get to the market value of consumer spending). Investment (I) : u The spending on capital equipment, inventories, and structures, including new housing through the Financial Sector. (this can also be sourced from profits from the firm)
The Components of GDP Government Purchases (G) : u The spending on goods and services by the Public Sector. (Does not include transfer payments because they are not made in exchange for currently produced goods or services.) Net Exports (NX) : u Exports minus imports, plus many more money flows that will be studied in section III – from/to the Foreign/Trade/Overseas Sector.
Withdrawals (W) and Injections (J) in an unchanging system, ∑ W = ∑ J but… G≠T, as government budgets may adjust them separately, and may borrow/save overseas S≠I, as households (S) operate separately from firms (I), and banks multiply household savings X≠M, as foreign consumers (X) operate separately from domestic consumers (M), resulting in trade imbalances
Firms Consumer Spending Households Income Financial Sector Saving Investment Financial Sector Saving Investment Government Transfers Taxation Government spending Government Transfers Taxation Government spending Overseas sector Export receipts Import payments