1. Introduction to Macroeconomics
SBC Economics
Introduction to Macroeconomics
Learning outcome U
Identify the main objectives of government economic policy
Describe the main indicators of economic performance
Explain the pattern of the UK economy over recent years
Describe the main economic policy instruments
Know the main schools of economic thought
Explain the Keynesian model of the circular flow of income and expenditure
Explain the workings of the circular flow model
Explain what is meant by the national income equilibrium
Explain the paradox of thrift
Explain the importance of the multiplier
Explain the limitations in the use of national income statistics
Reading: Units 24 & 25

2. Circular flow of income and expenditure
In macroeconomics we are concerned with the level of output of the economy, this is measured as National Income
We can calculate the level of national income by looking at the circular flow of income in the economy

3. Services of factors of production (labour, etc)
Goods and services
Consumer
expenditure
Wages, rent
dividends, etc.
Services of factors of production (labour, etc)

4. Circular flow of income and expenditure
The level of National Income can be measured by:
National output (O)
National expenditure (E)
National income (Y)

5. Circular flow of income and expenditure
Income, expenditure and output are the three ways of measuring national income
They measure the same flow
They must therefore be equal, so:
O=E=Y
This is known as national income equilibrium

6. Circular flow of income and expenditure
There are leakages and injection to the circular flow of income
Leakages are incomes of households that are not passed on, these are:
Saving (S)
Taxes (T)
Spending on imports (M)
Injections are the demand for firms’ output from sources other than consumer spending, these are:
Investment (I)
Government spending (G)
Spending on exports (X)

7. Circular flow of income and expenditure
Note that saving is a leakage from the circular flow of income
Although a certain level of saving is desirable too much saving in an economy can cause problems
As people save more they will spend less and so firms will produce less causing a fall in national income
This is known as the paradox of thrift

8. Circular flow of income and expenditure
Question
How do saving rates in China compare with other countries?

9. The multiplier effect
When injections are made to the circular flow of income the level of national income will increase
Keynes argued that the level of national income would increase by more than the value of the injection
This is known as the multiplier effect

10. The multiplier effect Example:
The government spends $100 million on building a highway
The government would hire firms to build the road
The firms would use some of the money to pay their workers
The workers would spend the money on good and services
The firms that made the goods and services would then pay their workers who would again spend their money and so on………
Each job created would indirectly create jobs in other areas and the national income would grow

11. Measuring national income
The measure of national income in most countries is Gross Domestic Product (GDP)
GDP measures the total market values of goods and services produced by workers and capital within a country during a given period (usually 1 year)

12. Measuring national income
There are some limitations to national income statistics
Statistical inaccuracies, millions of calculations must be made and mistakes will be made
The hidden economy, workers may claim not to be working to avoid paying tax or may claim to earn less than they do to reduce their tax payments. Sometimes known as the black economy
Home produced services, farming work or housework may not be included
The public sector, output of the public sector is not bought and sold as is therefore difficult to accurately calculate