Introduction to Macroeconomic

Concepts

Re-cap

• Main government policy objectives concerning macroeconomic performance

– Low unemployment– Low and stable inflation– Satisfactory balance of

payments position– Steady economic growth

• Key Indicators of macroeconomic performance – ie how successful is the government being in meeting its objectives

– The level of output– Economic growth– Inflation rate– Level and rate of unemployment– The balance of payments

position

Macroeconomics concerns the study of the ‘whole’ economy – eg UK, Europe

The flow of money in an economy – “The Circular Flow of Income”

• The simplest macroeconomic model assumes a ‘two-sector closed economy’ in which all income received is passed on

• Households (H) provide the

factors and in return receive income )in the form of wages, rent, interest and profit) which they spend on goods and services produced by firms (F) in the economy

The Four-Sector Open Economy• The model can be

made more realistic by adding government and overseas sectors and by allowing for injections (J) and withdrawals (W).

• This circular flow diagram shows injections and withdrawals from the simple model of the whole economy.

• This is now a four-sector economy

H

F

Consumer Expenditure

Factor Income

Savings

Taxes

Imports

Savings

Taxes

Imports

Government Spending

Government Spending

Exports

Investments

National IncomeThe circular flow diagram shows that there are three ways of measuring national income, each giving the same total. It follows from the circular model that

National Income = National Output = National Expenditure