Macro-Economics The Big Picture

Macroeconomics is the study of the large economy as a whole. It is the study of the big picture. Macroeconomics is the study of the large economy as a whole. It is the study of the big picture. Instead of analyzing one consumer, we analyze everyone.Instead of analyzing one consumer, we analyze everyone. Instead of one business we study all businesses.Instead of one business we study all businesses. What is Macroeconomics? Why study the whole economy? The field of macroeconomics was born during the Great Depression.The field of macroeconomics was born during the Great Depression. Government didn’t understand how to fix a depressed economy with 25% unemployment.Government didn’t understand how to fix a depressed economy with 25% unemployment. Macro was created to:Macro was created to: 1.Measure the health of the whole economy. 2.Guide government policies to fix problems. 2

The Three Goals of Macro Economic Policy Economic Growth:Economic Growth: –Is the economy increasing its capability to produce more goods and services? Full-Employment:Full-Employment: –Is the economy providing jobs for those who want to be employed? Price Stability:Price Stability: –Prices are signals that help us coordinate the resources of the economy. In order to be most efficient we must get clear and dependable signals. Without price stability, consumers and producers are less likely to make good decisions that will benefit the overall economy.

The circular flow of income

The Interdependence of Product and Factor markets The Interdependence of Product and Factor markets

FIRMS (suppliers of goods and services, demanders of factor services) HOUSEHOLDS (demanders of goods and services, suppliers of factor services) The interdependence of goods and factor markets

P Q P Q $ $ $$ Factor services Goods Factor services (1) Consumer demand demand (4) Factor supply supply (3) Factor demand demand (2) Producer supply supply P1P1 Q1Q1 O PF1PF1 QF1QF1 O D1D1 S D1D1 S

The interdependence of goods and factor markets P Q P Q $ $ $$ Factor services Goods Factor services S S D1D1 D1D1 (1) Consumer demand demand (4) Factor supply supply (3) Factor demand demand (2) Producer supply supply P1P1 Q1Q1 O O D2D2 PF1PF1 QF1QF1

The interdependence of goods and factor markets P Q P Q $ $ $$ Factor services Goods Factor services S S D1D1 D1D1 (1) Consumer demand demand (4) Factor supply supply (3) Factor demand demand (2) Producer supply supply P1P1 Q1Q1 O O P2P2 Q2Q2 PF1PF1 QF1QF1 D2D2

The interdependence of goods and factor markets P Q P Q $ $ $$ Factor services Goods Factor services S S D1D1 D1D1 (1) Consumer demand demand (4) Factor supply supply (3) Factor demand demand (2) Producer supply supply P1P1 Q1Q1 O O P2P2 Q2Q2 D2D2 PF1PF1 QF1QF1 D2D2

The interdependence of goods and factor markets P Q P Q $ $ $$ Factor services Goods Factor services S S D1D1 D1D1 (1) Consumer demand demand (4) Factor supply supply (3) Factor demand demand (2) Producer supply supply P1P1 Q1Q1 O O P2P2 Q2Q2 PF1PF1 QF1QF1 PF2PF2 QF2QF2 D2D2 D2D2

The circular flow of income Additional Sectors of the Circular Flow Model We already know about HOUSEHOLDS and FIRMS, however, the GOVERNMENT and FOREIGN Sectors play a large part in our Economy

Consumption of domestically produced goods and services (C d ) The circular flow of income

Factor payments Consumption of domestically produced goods and services (C d ) The circular flow of income

Factor payments Consumption of domestically produced goods and services (C d ) The circular flow of income ABROAD Export expenditure (X) Import expenditure (M)

Factor payments Consumption of domestically produced goods and services (C d ) The circular flow of income ABROAD Export expenditure (X) Import expenditure (M)

Factor payments Consumption of domestically produced goods and services (C d ) GOV. Net taxes (T) The circular flow of income ABROAD Export expenditure (X) Import expenditure (M)

Factor payments Consumption of domestically produced goods and services (C d ) GOV. Government expenditure (G) Net taxes (T) The circular flow of income ABROAD Export expenditure (X) Import expenditure (M)

Markets Within the Circular Flow Model With the HOUSEHOLD, FIRM, GOVERNMENT, and FOREIGN sectors we’ve only talked about both the Product and Factor Markets.With the HOUSEHOLD, FIRM, GOVERNMENT, and FOREIGN sectors we’ve only talked about both the Product and Factor Markets. –The last portion of the circular flow deals with the FINANCIAL MARKET

Factor payments Consumption of domestically produced goods and services (C d ) BANKS, etc GOV. ABROAD Government expenditure (G) Net saving (S) Net taxes (T) Import expenditure (M) The circular flow of income Export expenditure (X)

Factor payments Consumption of domestically produced goods and services (C d ) BANKS, etc GOV. ABROAD Investment (I) Government expenditure (G) Export expenditure (X) Net saving (S) Net taxes (T) Import expenditure (M) The circular flow of income

Factor payments Consumption of domestically produced goods and services (C d ) BANKS, etc GOV. ABROAD Investment (I) Government expenditure (G) Export expenditure (X) Net saving (S) Net taxes (T) Import expenditure (M) The circular flow of income LEAKAGES

Factor payments Consumption of domestically produced goods and services (C d ) BANKS, etc GOV. ABROAD Investment (I) Government expenditure (G) Export expenditure (X) Net saving (S) Net taxes (T) Import expenditure (M) The circular flow of income LEAKAGES INJECTIONS