Introduction to Macroeconomics

This set of vocabulary flashcards covers the core concepts of macroeconomics, the five sectors of the circular flow of income model, various budget outcomes, and the components of Gross Domestic Product (GDP) based on the lecture transcript.

Macroeconomics

The study of the economy as a whole, focusing on the big picture, economic growth, fluctuations, business cycles, inflation, and unemployment.

Microeconomics

The study of individual units within the economy, such as individual markets, households, firms, and the effect on the price of a specific good.

Macroeconomic indicators

Statistics or data readings that reflect the direction of the economy used by businesses, governments, and consumers to assess current and future economic health.

Gross Domestic Product (GDP)

The total value of all final goods and services produced within a specific time period.

Two-sector model

A simplified macroeconomy representation describing the flow of resources, goods, services, income, and spending between the household and firm sectors.

Real Flow

The movement of resources (natural, human, capital) and goods and services between households and firms.

Money Flow

The movement of income (wages, rent, interest, dividends, profit) and spending on goods and services between households and firms.

Three-sector model

An economic model that adds the financial sector to the two-sector model, introducing the concept of saving and investment.

Savings (S)

The portion of income not spent on goods and services for current consumption, representing a leakage from the circular flow of income.

Investment (I)

Expenditure by firms on new capital goods, such as equipment, machinery, buildings, or housing, for the future production of goods and services.

Leakages

Factors that reduce the flow of money between households and firms, defined as $S + T + M$ (Savings, Taxation, and Imports).

Injections

Factors that increase the flow of money in the circular flow, defined as $I + G + X$ (Investment, Government spending, and Exports).

Four-sector model

An economic model that adds the government sector, introducing taxation as a leakage and government spending as an injection.

Taxation (T)

A compulsory payment made by individuals and businesses to the government in the form of direct taxes like income tax or indirect taxes like GST.

Government Spending (G)

Money spent by the public sector on goods and services, including current expenditure ($G1$) and capital expenditure ($G2$).

G1 (Current Expenditure)

Government spending on current goods and services such as wages, salaries, fuel, power, and stationery.

G2 (Capital Expenditure)

Government spending on capital or investment goods such as schools, rails, ports, and hospitals.

Balanced Budget

A budget outcome where taxation equals government spending ($T = G$), resulting in a neutral effect on the economy.

Deficit Budget

A budget outcome where government spending is greater than taxation ($G > T$), resulting in an expansionary effect.

Surplus Budget

A budget outcome where taxation is greater than government spending ($T > G$), resulting in a contractionary effect.

Five-sector model

A model that incorporates the overseas sector, accounting for the leakage of imports and the injection of exports.

Imports (M)

Money paid to other countries for goods and services, such as electronic goods purchased from Korea, representing a leakage of money flowing out.

Exports (X)

Money earned from other countries for goods and services, such as iron ore sales to China, representing an injection of money flowing in.

Equilibrium

A situation where there is no tendency for change, occurring when $O = Y = E$ and total leakages equal total injections ($S + T + M = I + G + X$).

Disequilibrium

A state where leakages do not equal injections ($S + T + M \neq I + G + X$), leading the economy to expand or contract to reach a new equilibrium.

Inventories

The goods and materials that businesses hold as stock levels for the purpose of production or resale.

Aggregate Expenditure (AE)

The total expenditure on final goods and services produced by the four major sectors, calculated as $AE = C + I + G + (X - M)$.

Durable goods

Consumption items that last for a long time, accounting for approximately $15\text{\%}$ of household final consumption expenditure.

Non-durable goods

Consumption items that are used up quickly, accounting for approximately $35\text{\%}$ of household final consumption expenditure.