WELCOME TO MACROECONOMICS! Unit 2.1: The Level of Overall Economic Activity Section 1: The Circular Flow Model

Macroeconomics What is Macroeconomics? Micro deals with individual households, firms, industries, or markets Macro deals with whole or entire economies Key word: “Aggregate” (sum of) The IB Macroeconomics Syllabus 2.1: the Level of Overall Economic Activity 2.2: Aggregate Demand and Aggregate Supply 2.3: Macroeconomic Objectives 2.4: Fiscal Policy 2.5: Monetary Policy 2.6: Supply-side Policies

2.1 Overall Economic Activity Circular Flow of Income Model Understand the flow of income between households and firms Identify the four factors of production/payments Income Flow vs. Expenditure Flow vs. Output Flow Diagram the circular flow of income – in an open economy Leakage – Injections Savings—Investment Taxes—Government Spending Imports—Exports Explain how the size of the circular flow changes due to injections/leakages

But First…A Reminder Can you draw the circular flow model? Households (Consumers) Firms (Businesses) Resource (Factor) Markets Product Markets Land Household Income Entrepreneurship Capital Labor Costs of Production Household Expenditure Revenues Goods and Services

Here’s a Start… See slide 12 for the completed diagram

The Circular Flow of Income Model: Basic Real Flow: The flow of Factors of Production (FoP) and Goods & Services FoP: _L__, ___L___, ___C___, ______E_________ The FoP’s flow from __Households___ to _____Firms______ Goods and Services flow from __Firms to Households__ Money Flow: The flow of, uh, money $ flows from Consumers to Firms for Goods and Services ( household expenditure) $ flows from Firms to Consumers for Factors of Production (household income) Factors of Production are paid for with: Factor Payment ___L_______________R_____________ ___L_______________W____________ ___C________________I____________ ___E________________P____________

What Does This Tell Us? Income flow: Firms to Households Income flow: Firms to Households Expenditure flow: Households to firms Expenditure flow: Households to firms Income from the sale of all F’s of P Expenditures by households on goods & services = = OR AND Value of Goods and Services or Total Output Value of Goods and Services or Total Output = = ==

The Model: Adding Leakages and Injections Households Firms Money Resource/Factor Market Product Market Leakage: Savings Injection: Investments Goods and Services Factors of Production

The Model: Adding Leakages and Injections Households Firms Money Leakage: Taxes GOV’T Injection: Government Spending Leakage: Taxes Goods and Services Product Market Resource/Factor Market Factors of Production

The Model: Adding Leakages and Injections Households Firms Money Leakage: Imports Injection: Exports Resource/Factor Market Product Market Factors of Production Goods and Services

TEST YOUR UNDERSTANDING Work with a partner: Page 185: TYU Questions 7.1 (By the way, the classic circular flow model is on Page 6 of the textbook)

Circular Flow Model