Chapter 6

Last updated Sep 12, 2023 Edit Source

• It is a macroeconomic model that describes the flows of resources, goods and services, and income and expenditure, between the parts of the economy.
• It divides the economy into its key sectors:
  • Households
  • Firms
  • The Financial Sector
  • The Government
  • The Overseas Sector

• Basic model
• Simplifies assumptions
  • Only two sectors in the economy - households and firms
  • Households are the owners of the productive resources (land, labour, capital and enterprise); and the buyers of final goods and services
  • Firms are the employers of resources, and produce all the goods and services for the economy
  • Households spend all their income, so there is no saving
  • There is no government sector
  • There is no overseas trade

• 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

• 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

• 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

• ‘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

• 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
  • - addition of all spending on goods and services
  • Production approach - in which the value of all goods and services produced is calculated

• $GDP=C+I+G+(X-M)$