Macro -> notes (labelled with spec point).
Note: definitions in purple.
National income & the circular flow of income (2.4.1 & 2.4.2)
Different groups of the economy = government, households, firms, banks, rest of the world
How are they all connected = all connected through income.
Some definitions ->
- The circular flow of income = a model of the economy, showing how income moves
around the various sectors.
- The central flow of income = the main part of the circular flow of income, measuring
the flow between firms and households.
- Leakages = any flow of income that takes away and reduces the central flow.
- Injections = any flow of income that adds to and increases the central flow.
- Households = the social units of people living in homes together.
Income vs wealth =
- Income = money received through work or financial investment.
Example: Bank account, pension, rent received from a tenant, wages…
- Wealth = the total value of the assets you own (just the stuff you own & their value).
Example: House, Picasso painting, savings in a bank account, shares in a company…
The circular flow of income -> (process)
1 = We earn income at least some of which we spend.
2 = We may be lucky enough to have some income we can save.
3 = We may use this to buy assets (houses, shares etc) which add to our wealth.
4 = As time goes but we hope that the value of the assets increase.
5 = Eventually, having made a profit, we can sell them, adding again to our income.
Meaning of letters ->
C = consumption -> spending on domestic goods & services.
E = exports -> income received from selling goods and service to other countries.
FP = factor payments -> money paid in order to obtain resources from production
GS = government spending -> money spent on providing goods & services for public use.
IM = imports -> spending other countries goods & services.
IN = investment -> money borrowed to pay for new capital goods (machines, equipment).
S = savings -> income for which spending is delayed in order to gain interest.
T = taxation -> money taken to be used for providing goods & services for public use.
Beware (true meaning of investment) ->
- Investment (actual definition) = The buying of new capital goods by firms (loans
normally taken out)
- Financial investment = Buying financial assets like shares/property to make profit.
LOOK -> the 2-sector model of the economy & the real model (ON PAPER).
Factor payments ->
- Households provide the factors of production.
, - Firms will pay for each of these factors of production in different ways:
- For land = will pay rent
- For labour = will pay wages
- For capital = will pay interest
- For entrepreneurship = will pay profit
Leakages and injections into the circular flow of income ->
- The three leakages in the circular flow of income: Savings, taxation, imports (when
we spend money on this)
- The three injections in the circular flow of income: Investment, government
spending, export (goes back to firms)
The Trade (business) cycle (2.5.3)
Some definitions ->
- The trade cycle = the fluctuation of GDP around the trend path, which can be divided
into four phases.
- GDP growth = an increase in the value of a country’s production, meaning it has
earnt more income.
- Total GDP = the overall value of a country’s production, forming its national income.
- Long -term trend growth path of output = the average increase in total GDP, when
fluctuation are removed.
Economic crashes -> (the four recent crashes) -> (least-> most devastating)
1 = 1918-1922 -> World War 1 (and after).
Reason = War/pandemic (Spanish flu pandemic followed by WW1)/Hyperinflation.
Example = Germany. Rank = 4th
2 = 2008-2012 -> The Sub-Prime mortgage crisis (The great recession).
Reason = Financial crash in the USA (housing market). Rank = 3rd
3 = 2020-2022 -> The Covid pandemic.
Reason = Pandemic and lockdowns. Rank = 2nd
4 = 1929-1939 -> Wall street crash (Great depression).
Reason = Financial crash in the USA (stock market). Rank = 1st
Economic reasons = Non-economic reasons =
- Financial crisis - Natural disasters
- Hyperinflation - War
- Pandemic
Financial crashes -> (chain of events) ->
- A new type of financial asset starts to become profitable
- More and more people notice and buy assets
, - The price rises quickly, until it is far beyond the value it used to have
- Some people begin to doubt if the price will continue to rise, so sell
- More and more people panic, sell, and therefore the price of the asset crashes.
The first financial crash = Holland (1634-1637) ‘Tulip Mania’ ->
- 1634 = Was the world’s richest country.
- Worlds first stock market & Europe’s first empire.
- After the crash, they never regained their position.
One bulb of a viceroy tulip -> costed a huge number of money & goods in return.
Why do financial crashes happen again & again (every 5 years approx) ->
- Humans = inherently greedy
- You can make a lot of money if you get financial investment right (buy low/sell high).
What effects do crashes have? What stops it?
Effects: Stopped by:
- (1) Negative GDP growth - (1) Time passes, confidence starts to improve.
- (2) Very high levels of unemployment - (2) Cheap resources -> workers, encourage firms
- (3) Rise in poverty levels to produce (can produce cheaply).
- (4) Opportunity for extremist politicians - (3) Cheap assets -> houses, shares etc -> can
(Hitler & rise to power). make profit form them again.
- (4) Government action to boost the economy.
The cycle -> (of an economic crash):
- Good times -> gets worse -> crash -> gets better -> good times.
- Good time: Economic boom, Get worse: Economic slowdown, Crash = economic
recession, Get better = economic recovery.
Some definitions ->
- Boom = A period of time at which GDP is at its highest.
- Slowdown = A period of time when GDP growth is slowing.
- Recession = A period of at least six months when GDP is negative.
- Recovery = A period of time when GDP growth is improving.
LOOK at the trade cycle and total GDP (diagram) -> on PAPER.
In a recession:
- GDP growth will be: Negative
Reason: Huge fall in income & profit means much less spending and therefore much lower prices.
- Unemployment will be: At its highest
Reason: Huge fall in production means a huge job cuts.
- Inflation will be: Very low, even negative (deflation)
Reason: Huge income & profit means much less spending and therefore much lower prices.
In a boom:
- GDP growth will be: At its highest
, Reason: Huge rise in income and profit means much more spending and therefore
much higher prices.
- Unemployment will be: At its lowest
Reason: Huge rise in production and therefore huge job rises.
- Inflation will be: At its highest
Huge increase in income & profit = much more spending and therefore much higher
prices.
The characteristics of AD (2.2.1)
If we want to know about ALL, the demand in our economy ->
- Take demand from households (consumption).
- Add demand from firms for capital goods (investment)
- Demand by government for g+s (Government spending)
- Demands from abroad for our g+s (Exports)
- Take away demand by use of g+s from other countries (imports)
Put this all together and we get total demand in our economy (called aggregate demand).
Some definitions ->
- Aggregate demand = total value of planned spending in the economy over a given
time period
- Consumption = the value of spending by households on domestically produced
goods and services.
- Investment = the value of spending by firms on capital goods.
- Net trade = the value of spending on a country’s exports minus spending on other
countries imports.
- Government spending = The value of spending by government on goods and
services.
Letters -> Important for the Aggregate demand equation
Aggregate demand = AD
Consumption by households = C
Investment by firms = I
Government spending = G
Net trade (Exports = X) and (Imports = M).
The Equation -> AD = C + I + G + (X-M)
The effects of an increase in AD ->
- More GDP growth -> As AD rises the greater demand means more production, as
firms will want to produce more to sell more. The value of national income will rise
leading to greater GDP growth.
Note: definitions in purple.
National income & the circular flow of income (2.4.1 & 2.4.2)
Different groups of the economy = government, households, firms, banks, rest of the world
How are they all connected = all connected through income.
Some definitions ->
- The circular flow of income = a model of the economy, showing how income moves
around the various sectors.
- The central flow of income = the main part of the circular flow of income, measuring
the flow between firms and households.
- Leakages = any flow of income that takes away and reduces the central flow.
- Injections = any flow of income that adds to and increases the central flow.
- Households = the social units of people living in homes together.
Income vs wealth =
- Income = money received through work or financial investment.
Example: Bank account, pension, rent received from a tenant, wages…
- Wealth = the total value of the assets you own (just the stuff you own & their value).
Example: House, Picasso painting, savings in a bank account, shares in a company…
The circular flow of income -> (process)
1 = We earn income at least some of which we spend.
2 = We may be lucky enough to have some income we can save.
3 = We may use this to buy assets (houses, shares etc) which add to our wealth.
4 = As time goes but we hope that the value of the assets increase.
5 = Eventually, having made a profit, we can sell them, adding again to our income.
Meaning of letters ->
C = consumption -> spending on domestic goods & services.
E = exports -> income received from selling goods and service to other countries.
FP = factor payments -> money paid in order to obtain resources from production
GS = government spending -> money spent on providing goods & services for public use.
IM = imports -> spending other countries goods & services.
IN = investment -> money borrowed to pay for new capital goods (machines, equipment).
S = savings -> income for which spending is delayed in order to gain interest.
T = taxation -> money taken to be used for providing goods & services for public use.
Beware (true meaning of investment) ->
- Investment (actual definition) = The buying of new capital goods by firms (loans
normally taken out)
- Financial investment = Buying financial assets like shares/property to make profit.
LOOK -> the 2-sector model of the economy & the real model (ON PAPER).
Factor payments ->
- Households provide the factors of production.
, - Firms will pay for each of these factors of production in different ways:
- For land = will pay rent
- For labour = will pay wages
- For capital = will pay interest
- For entrepreneurship = will pay profit
Leakages and injections into the circular flow of income ->
- The three leakages in the circular flow of income: Savings, taxation, imports (when
we spend money on this)
- The three injections in the circular flow of income: Investment, government
spending, export (goes back to firms)
The Trade (business) cycle (2.5.3)
Some definitions ->
- The trade cycle = the fluctuation of GDP around the trend path, which can be divided
into four phases.
- GDP growth = an increase in the value of a country’s production, meaning it has
earnt more income.
- Total GDP = the overall value of a country’s production, forming its national income.
- Long -term trend growth path of output = the average increase in total GDP, when
fluctuation are removed.
Economic crashes -> (the four recent crashes) -> (least-> most devastating)
1 = 1918-1922 -> World War 1 (and after).
Reason = War/pandemic (Spanish flu pandemic followed by WW1)/Hyperinflation.
Example = Germany. Rank = 4th
2 = 2008-2012 -> The Sub-Prime mortgage crisis (The great recession).
Reason = Financial crash in the USA (housing market). Rank = 3rd
3 = 2020-2022 -> The Covid pandemic.
Reason = Pandemic and lockdowns. Rank = 2nd
4 = 1929-1939 -> Wall street crash (Great depression).
Reason = Financial crash in the USA (stock market). Rank = 1st
Economic reasons = Non-economic reasons =
- Financial crisis - Natural disasters
- Hyperinflation - War
- Pandemic
Financial crashes -> (chain of events) ->
- A new type of financial asset starts to become profitable
- More and more people notice and buy assets
, - The price rises quickly, until it is far beyond the value it used to have
- Some people begin to doubt if the price will continue to rise, so sell
- More and more people panic, sell, and therefore the price of the asset crashes.
The first financial crash = Holland (1634-1637) ‘Tulip Mania’ ->
- 1634 = Was the world’s richest country.
- Worlds first stock market & Europe’s first empire.
- After the crash, they never regained their position.
One bulb of a viceroy tulip -> costed a huge number of money & goods in return.
Why do financial crashes happen again & again (every 5 years approx) ->
- Humans = inherently greedy
- You can make a lot of money if you get financial investment right (buy low/sell high).
What effects do crashes have? What stops it?
Effects: Stopped by:
- (1) Negative GDP growth - (1) Time passes, confidence starts to improve.
- (2) Very high levels of unemployment - (2) Cheap resources -> workers, encourage firms
- (3) Rise in poverty levels to produce (can produce cheaply).
- (4) Opportunity for extremist politicians - (3) Cheap assets -> houses, shares etc -> can
(Hitler & rise to power). make profit form them again.
- (4) Government action to boost the economy.
The cycle -> (of an economic crash):
- Good times -> gets worse -> crash -> gets better -> good times.
- Good time: Economic boom, Get worse: Economic slowdown, Crash = economic
recession, Get better = economic recovery.
Some definitions ->
- Boom = A period of time at which GDP is at its highest.
- Slowdown = A period of time when GDP growth is slowing.
- Recession = A period of at least six months when GDP is negative.
- Recovery = A period of time when GDP growth is improving.
LOOK at the trade cycle and total GDP (diagram) -> on PAPER.
In a recession:
- GDP growth will be: Negative
Reason: Huge fall in income & profit means much less spending and therefore much lower prices.
- Unemployment will be: At its highest
Reason: Huge fall in production means a huge job cuts.
- Inflation will be: Very low, even negative (deflation)
Reason: Huge income & profit means much less spending and therefore much lower prices.
In a boom:
- GDP growth will be: At its highest
, Reason: Huge rise in income and profit means much more spending and therefore
much higher prices.
- Unemployment will be: At its lowest
Reason: Huge rise in production and therefore huge job rises.
- Inflation will be: At its highest
Huge increase in income & profit = much more spending and therefore much higher
prices.
The characteristics of AD (2.2.1)
If we want to know about ALL, the demand in our economy ->
- Take demand from households (consumption).
- Add demand from firms for capital goods (investment)
- Demand by government for g+s (Government spending)
- Demands from abroad for our g+s (Exports)
- Take away demand by use of g+s from other countries (imports)
Put this all together and we get total demand in our economy (called aggregate demand).
Some definitions ->
- Aggregate demand = total value of planned spending in the economy over a given
time period
- Consumption = the value of spending by households on domestically produced
goods and services.
- Investment = the value of spending by firms on capital goods.
- Net trade = the value of spending on a country’s exports minus spending on other
countries imports.
- Government spending = The value of spending by government on goods and
services.
Letters -> Important for the Aggregate demand equation
Aggregate demand = AD
Consumption by households = C
Investment by firms = I
Government spending = G
Net trade (Exports = X) and (Imports = M).
The Equation -> AD = C + I + G + (X-M)
The effects of an increase in AD ->
- More GDP growth -> As AD rises the greater demand means more production, as
firms will want to produce more to sell more. The value of national income will rise
leading to greater GDP growth.
