Macro-Economics
The Big Picture
What is Macroeconomics?
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 one business we study all businesses.
Why study the whole economy?
• The field of macroeconomics was born during
the Great Depression.
• Government didn’t understand how to fix a
depressed economy with 25% unemployment.
• 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:
– Is the economy increasing its capability to
produce more goods and services?
• Full-Employment:
– Is the economy providing jobs for those who
want to be employed?
• 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 circular flow of income
The Interdependence
of Product and
Factor markets
The interdependence of goods 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
(3) Factor
demand
$
(2) Producer
supply
$
Factor
services
P
Goods
P
S
PF1
S
P1
D1
D1
O
QF1
Q
Factor
services
(4) Factor
supply
$
O
Q1
Q
Goods
$
(1) Consumer
demand
The interdependence of goods and factor markets
(3) Factor
demand
$
(2) Producer
supply
$
Factor
services
P
Goods
P
S
S
PF1
P1
D2
D1
O
QF1
Q
Factor
services
(4) Factor
supply
$
D1
O
Q1
Q
Goods
$
(1) Consumer
demand
The interdependence of goods and factor markets
(3) Factor
demand
$
(2) Producer
supply
$
Factor
services
P
Goods
P
S
S
P2
P1
PF1
D2
D1
O
QF1
Q
Factor
services
(4) Factor
supply
$
D1
Q1 Q 2
O
Q
Goods
$
(1) Consumer
demand
The interdependence of goods and factor markets
(3) Factor
demand
$
(2) Producer
supply
$
Factor
services
P
Goods
P
S
S
P2
P1
PF1
D2
D2
D1
O
QF1
Q
Factor
services
(4) Factor
supply
$
D1
Q1 Q 2
O
Q
Goods
$
(1) Consumer
demand
The interdependence of goods and factor markets
(3) Factor
demand
$
(2) Producer
supply
$
Factor
services
P
Goods
P
S
S
PF2
P2
P1
PF1
D2
D2
D1
O
QF1QF2
Q
Factor
services
(4) Factor
supply
$
D1
Q1 Q 2
O
Q
Goods
$
(1) Consumer
demand
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
The circular flow of income
Consumption of
domestically
produced goods
and services (Cd)
The circular flow of income
Factor
payments
Consumption of
domestically
produced goods
and services (Cd)
The circular flow of income
Export
expenditure (X)
Factor
payments
Consumption of
domestically
produced goods
and services (Cd)
ABROAD
Import
expenditure (M)
The circular flow of income
Export
expenditure (X)
Factor
payments
Consumption of
domestically
produced goods
and services (Cd)
ABROAD
Import
expenditure (M)
The circular flow of income
Export
expenditure (X)
Factor
payments
Consumption of
domestically
produced goods
and services (Cd)
ABROAD
GOV.
Import
expenditure (M)
Net
taxes (T)
The circular flow of income
Export
expenditure (X)
Factor
payments
Consumption of
domestically
produced goods
and services (Cd)
Government
expenditure (G)
ABROAD
GOV.
Import
expenditure (M)
Net
taxes (T)
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.
–The last portion of the circular flow
deals with the FINANCIAL MARKET
The circular flow of income
Export
expenditure (X)
Government
expenditure (G)
Consumption of
Factor
payments
domestically
produced goods
and services (Cd)
ABROAD
GOV.
BANKS, etc
Net
taxes (T)
Import
Net
expenditure (M)
saving (S)
The circular flow of income
Export
expenditure (X)
Factor
payments
Consumption of
domestically
produced goods
and services (Cd)
Investment (I)
Government
expenditure (G)
ABROAD
Import
expenditure (M)
GOV.
BANKS, etc
Net
taxes (T)
Net
saving (S)
The circular flow of income
Export
expenditure (X)
Factor
payments
Consumption of
domestically
produced goods
and services (Cd)
Investment (I)
Government
expenditure (G)
ABROAD
GOV.
BANKS, etc
Net
Import
taxes (T) Net
expenditure (M)
saving (S)
LEAKAGES
The circular flow of income
INJECTIONS
Export
expenditure (X)
Investment (I)
Government
expenditure (G)
Consumption of
Factor
payments
domestically
produced goods
and services (Cd)
ABROAD
Import
expenditure (M)
GOV.
BANKS, etc
Net
taxes (T)
Net
saving (S)
LEAKAGES