Introduction to Macroeconomics

Last updated Jun 22, 2023 Edit Source

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• The Circular Flow of Income is a macroeconomic model that describes the flow of income and expenditure between different sectors in the economy

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  • Components affecting the CFI:
    • Savings (S)
    • Investments (I)
    • Government Expenditure (G) and Taxation (T)
    • Export Revenue (X) and Import Expenditure (M)
  • Injections vs Withdrawals
    • Injections are inflows of money into the circular flow of income
      • I + G + X
    • Withdrawals are outflows of money out of the circular flow of income
      • S + T + M
    • An economy is in equilibrium when injections = withdrawals (STM = IGX)
  • The CFI highlights an important principle:
    • Income flow from firms to households = the expenditure flow from households to firms

• Measuring Economic Activity is also known as National Income Accounting Methods
• National Income (GDP) is a measure of the monetary value of the flow of output of goods and services produced in an economy over a period of time
  • Purpose of National Income Accounting is to provide data to monitor the performance of the overall economy
  • National Income is the same as actual growth
• National Income can be measured in 3 ways:
  • Expenditure Approach
    • Adds up all spending to buy final goods and services produced within a given time period
    • National Expenditure = C + I + G + (X-M)
      • C = Consumer Spending/Consumption Expenditure
  • Income Approach
    • Adds up all income earned by the factors of production that produce all goods and services within a given time period
    • National Income = W + R + I + P
      • Wages, rent, interest, profit
  • Output Approach
    • Calculates the value of all final goods and services produced in a country over a time period
  • National Expenditure = National Income = National Output

• Aggregate Expenditure (AE) is the total planned expenditure on final goods and services at a given price level by economic agents
  • The aggregate expenditure is the total expenditure in the economy

• Aggregate Expenditure is made of consumption expenditure (C), investment expenditure (I), government expenditure (G) and net expenditure on exports (X $-$ M)
  • C + I + G + (X $-$ M)
    • Households + Firms + Government + Foreign

• # Consumption Expenditure (C)

  • Consumption expenditure is the purchase of domestic goods and services
    • It is the part of national income spend on consumer goods
  • Factors Affecting Consumption Expenditure:
    • Income (Disposable) $Y_d$
    • Level of Interest Rates
    • Accessibility of Credit
    • Government Policy
    • Price Expectations
    • Savings

• # Investment Expenditure (I)

  • Investments are expenditure on capital goods, stocks of raw materials and intermediate goods
    • An intermediate good is a product used to produce a final good or finished product
  • Factors Affecting Investment Expenditure:
    • Interest Rates
    • Business Expectations
    • Government Policy
    • Technological Change
    • Infrastructure

• # Government Expenditure (G)

  • Government expenditure is spending by the government
    • It is independent of changes in national income in short-term
  • Government expenditure is broken into two sectors:
    • G1: Current expenditure which provides for day to day functions of the government
    • G2: Current expenditure to provide for future needs
      • e.g. schools, roads, power, communications, dams, etc.

• # Net Expenditure (X $-$ M)

  • X - Export Revenue
    • Refers to revenue received from the sale of g&s to foreign countries
    • An increase in export revenue will cause an increase in output and income
    • Exports are influenced by the national income of the foreign country and are independent of the national income of the local economy
  • M - Import Revenue
    • Refers to expenditure incurred from purchasing g&s from foreign countries
    • Imports are a financial leakage from the circular flow of income