Intro to Macroeconomics

Last updated Sep 12, 2023 Edit Source

Definition A Macroeconomic model that describes the flows of resources, goods and service, income and expenditure between different parts of the economy.

• Firms
• Households
• Government
• Financial Sector
• Overseas

• Households own all the resources and are buyers
• Firms are employers and produce goods and services
• Factor market
• Product market
• The two markets are interdepended

Definition Inflow of money into the circular flow of income

• Investment (I)
• Government Expenditure (G)
• Exports (X)

Definition Outflow of money from the circular flow of income

• Savings (S)
• Taxation (T)
• Imports (M)

• An economy is in equilibrium when the sum of all leakages = the sum of all injections
• Occurs when S+T+M = I+G+X
• Sum of all output (O) = Sum of all Expenditure (E) = Sum of all income (Y)
  • All the income from households equals the expenditure on goods and services which equals the total production in the economy

• Flow of Y must contract
• Total spending is less than output
• Inventories increases due to less expenditure
• Firms decrease production
• Households receives less income TBF

• Expenditure approach
  • Addition of all final expenditures within a country given a period of time
• National income approach
  • Addition of al income earned from factors of production that produce goods and services given a period of time
• Output approach
  • Addition of all value of goods and services produced in a country given a period of time

Definition Total amount that firms, households and government plan to spend on final goods and services at each level of income

• Calculated as AE = C + I + G + (X-M)

Households expenditure goods and services:

• Durables: >3 years
• Non-durables: <3 years
• Services
• Something else

• Disposable income: More income = more spending
• Interest rates: High interest rates = more saving
• Availability of credit: More loans = more spending
• Stock of personal wealth: More wealth = more spending
• Expectations: Expecting economy downturn = more saving
• Government policies: Higher tax = less spending

Definition Expenditure on producer or capital goods that are used to produce final goods and services in the future

• Fixed investment (usually on capital goods)
• Residential fixed investment (private expenditure on new housing)
• Changes in business inventories (stocks of goods that have been produced but not sold)

• Rate of interest (nominal vs real rates): Higher interest rates = less spending
• Business expectations
• Level of past profits (profitability)
• Government policies

• All federal, state, local government expenditure
• 2 parts:
  • G1: Current government expenditure on day to day functions
  • G2: Government expenditure used for future needs

• Government policy objectives
• Current economic climate

• Value of exports minus value of imports

• Exchange rates: $AUD increases = Imports decreases and exports increase
• Domestic and overseas economic activity: Aus doing well = Imports increase, overseas doing well = Exports increase
• Tariffs/Quotas: Higher tariffs = decrease