Models of Macroeconomic Activity and Growth

Assessment 5 - covering ch 6,7,8

Macroeconomics

. the study of aggregate economic behaviour or activity in the economy as a whole

Expenditure (E)

. spending on goods and services by households, businesses and the gov

—> households = consumption spending

—> business = investment spending

—> gov = gov spending

—> overseas = net overseas spending (X-M)

Output (O)

. total production of goods and services produced in an economy during a specific period

. measured in dollar terms = GDP

Income (Y)

. total earnings of individuals, businesses, and the gov over a period of time

—> largely generated as result of the production + sale of products

—> comes in form of welfare payments (without g+s being received in return)

Aggregate demand (AD)

. the total amount of domestically produced final products demanded in an economy at a given overall price level and in a given time period

. AD = C + I + G + (X-M)

Aggregate supply

. the total supply of goods and services produced within an economy at a given overall price level in a given time period

GDP

. the total market value of final goods and services produced within an economy over a given time period

CFY model description

. macroeconomic model that describes the flows of resources, goods and services, and income and expenditure

. an economic model that illustrates how money moves from producers to consumers and back again in an endless loop

GDP and total/national income relationship in CFY model

. GDP is equal to total income claims generated by the production of goods and services

. the circular flow of income and products implies that GDP is equal to national income

Draw the simple CFY model

Simple CFY model assumptions

. only 2 sectors in economy (households + firms)

. all output produced by firms is sold to households (no surplus)

. households spend all of their income (no savings)

. no gov sector

. no overseas trade

Where are real and money flows on the CFY model

. inside flows (resources and goods + services) = real flows

. outside flows (income + spending) = money flows

Outline households

. consumers

. consist of 1 or more persons who live in the same housing unit

. owners of productive resources (natural, human and capital)

Outline firms

. producers

. employers of resources which they use to produce products for the economy

Outline the factor market

. consists of resources + income

. firms hire natural, human and capital resources from households

—> in return for which firms provide various types of income:

. wages or salaries: money for working

. rent: money in return for land or property

. dividends: money in return for capital they have invested in companies

. interest: payment on surplus money lent to banks or financial institutions

. profits: money from their managerial + entrepreneurial skills (enterprise)

Outline the product market

. consists of goods + services, and consumer spending

. households exchange their income they have earned for goods and services produced by firms

Simple CFY model and interdependence

. demonstrates that people in modern economies are interdependent (dependent upon one another)

. it’s a much better use of scarce resources, both for individuals + groups to specialise and exchange

Specialisation

. concentrate on and become expert in the production of something

Exchange

. an act of giving one thing and receiving another

Household sector

. made up of individuals in the economy

. provide their time + skills or labour to firms in exchange for income (wages)

. are consumers who buy g + s from firms

. may borrow from or save money with financial sector

. pay taxes to gov

Firms sector

. made up of all businesses in the economy

. produce output (g+s), which they sell to consumers + receive revenue

. may borrow money from or save money with financial sector

. pay taxes to gov

Injections

. the introduction of money into the circular flow of income, increasing the overall level of economic activity

—> investment, gov spending, exports

Leakages

. the withdrawal of money from the circular flow of income and expenditure in an economy

—> uses of income that are not spent on domestically produced goods and services

—> savings, taxes, imports

—> reduce the overall level of economic activity

Outline the financial sector (capital market)

. financial institutions such as banks, credit unions, and superannuation funds

Savings

. portion of household (disposable) income not spent on g+s for current consumption

Investment

. purchase or production of capital goods that will be used to produce final goods, including assets such as buildings, machinery, equipment, vehicles and tools

Describe the leakages in the financial sector