Three economic agents decision makers Macro objectives
Consumers micro Economic growth sustainable
Businesses lowunemployment
Government macro studyofthe whole economy of inflation lowof2
Maintainbalance of payments
Index numbers
Quantative measure of growth inpricesproduction1inventory and other quantities
of economicinterest
allow us to make good comparisons over time
Start at a baseyear.atindex number of 100
Show proportion of total expenditure spent on different categories of goods1service
22
ex 2007 zoo A 70 11090 9 9indexnumber ex GPP
per worker
2008 220 Index number 100110 110 is an indexnumber
Number will be
New GDP x 101 Real value change in GDP Discount Inflation used to compare
Indexnumber
GDP between
Uses of Index numbers
years helping
to indicate
Study trends of pricelevel production importlexports economicgrowth
Help government enforce laws
Measure value of money
Help forecast future trends
Real value GDP after inflation hasbeen accounted for ex at constantprices
growth of
Nominalvalue growth of GDP before inflation hasbeen accounted for ex at current prices
Real Income Income after inflation hasbeen
circular flow of income counted
for
movement of goodsservices between households Real income rise when nomino
and firms and their payments in monetary terms income rise more than price
goodsiserri
TonsumerexpenditureT nMhM
level
o o o oo
oo o o o
n o o o 00
Households si Firms
factors
ofproduction
Income
of workers 1shareholders is spent Expenditure
Firms use the expenditure to pay for factors of production ex labour rent rawmaterials
Assumptions Solving ratio proportion of national income
that is saved
Economy consists of two sectors f
Households
saving
Firms ratio
Household spend all their income
on goods and services and do not solve
All output produced byfirms is purchased by households
Nofinancial sector
No governmentsector
No overseas sector
shrink1slowdowneconomicactivity expand1
speedupeconomic activity
WithdrawalsLdvalue of circularflow Injection 9value of circular flow
, h l I I j l I e l
Money leaving the economy money entering the economy
Savings Investment
Taxation Government spending
Imports Exports
Netwithdrawal contraction
ofproduction Net injections expansion of nationaloutput
doutput
Multiplier list or
Any injection of new goods and services into the circular flow of income will
lead to further rounds of spending
ex Government spending to build new railways would employ workers Income
gained by workers would then be spent
Multiplier Effect
total effect on demand in the economy is greater than the initial injection of
spending
If people spend income Multiplier Effect increases It save decreases
Factorincome ex wages through government building houses
increase
size of multiplier depends on MarginalPropensity to Consume mpc or mps
M PC proportion of each additional pound of household income thatis spent
M.P.lt M P 5 1
Marginal Propensity to tax MPT
proportion of each pound taxed by the government 9tax dincome dspending dmultiple
Marginal Propensity to import MPM
If consumers spend income on imports rather than domestic goods
Income is withdrawn circular flow
from of income dsize of multiplier
M.pe A
consumption 1
D Income multipliers
a Mpc
Effect on economy_initial injection x mpc
AGDP or 1
multiplier AGovernment MPWwithdrawal
spending M PW M PSt M.PT t M PM
SS St AImport
ex Increase in income of car workers 200M Ty Jy SY
Spend 180M 90 Mpc 0.9
Save 20M 40 Mps 0.1 to multiplier
200 10 2000 m increase in nationalincome
Size of the multiplier determines how much the initial injection is applied
If consumers solve more thanspend size of multiplier will be small
Nominal
Real GDP
Xt
GDP Indenxumber ex 2005 GDP 2,857,630m Index 101.3 So RealGDP 2857630
101.3 10
Consumers micro Economic growth sustainable
Businesses lowunemployment
Government macro studyofthe whole economy of inflation lowof2
Maintainbalance of payments
Index numbers
Quantative measure of growth inpricesproduction1inventory and other quantities
of economicinterest
allow us to make good comparisons over time
Start at a baseyear.atindex number of 100
Show proportion of total expenditure spent on different categories of goods1service
22
ex 2007 zoo A 70 11090 9 9indexnumber ex GPP
per worker
2008 220 Index number 100110 110 is an indexnumber
Number will be
New GDP x 101 Real value change in GDP Discount Inflation used to compare
Indexnumber
GDP between
Uses of Index numbers
years helping
to indicate
Study trends of pricelevel production importlexports economicgrowth
Help government enforce laws
Measure value of money
Help forecast future trends
Real value GDP after inflation hasbeen accounted for ex at constantprices
growth of
Nominalvalue growth of GDP before inflation hasbeen accounted for ex at current prices
Real Income Income after inflation hasbeen
circular flow of income counted
for
movement of goodsservices between households Real income rise when nomino
and firms and their payments in monetary terms income rise more than price
goodsiserri
TonsumerexpenditureT nMhM
level
o o o oo
oo o o o
n o o o 00
Households si Firms
factors
ofproduction
Income
of workers 1shareholders is spent Expenditure
Firms use the expenditure to pay for factors of production ex labour rent rawmaterials
Assumptions Solving ratio proportion of national income
that is saved
Economy consists of two sectors f
Households
saving
Firms ratio
Household spend all their income
on goods and services and do not solve
All output produced byfirms is purchased by households
Nofinancial sector
No governmentsector
No overseas sector
shrink1slowdowneconomicactivity expand1
speedupeconomic activity
WithdrawalsLdvalue of circularflow Injection 9value of circular flow
, h l I I j l I e l
Money leaving the economy money entering the economy
Savings Investment
Taxation Government spending
Imports Exports
Netwithdrawal contraction
ofproduction Net injections expansion of nationaloutput
doutput
Multiplier list or
Any injection of new goods and services into the circular flow of income will
lead to further rounds of spending
ex Government spending to build new railways would employ workers Income
gained by workers would then be spent
Multiplier Effect
total effect on demand in the economy is greater than the initial injection of
spending
If people spend income Multiplier Effect increases It save decreases
Factorincome ex wages through government building houses
increase
size of multiplier depends on MarginalPropensity to Consume mpc or mps
M PC proportion of each additional pound of household income thatis spent
M.P.lt M P 5 1
Marginal Propensity to tax MPT
proportion of each pound taxed by the government 9tax dincome dspending dmultiple
Marginal Propensity to import MPM
If consumers spend income on imports rather than domestic goods
Income is withdrawn circular flow
from of income dsize of multiplier
M.pe A
consumption 1
D Income multipliers
a Mpc
Effect on economy_initial injection x mpc
AGDP or 1
multiplier AGovernment MPWwithdrawal
spending M PW M PSt M.PT t M PM
SS St AImport
ex Increase in income of car workers 200M Ty Jy SY
Spend 180M 90 Mpc 0.9
Save 20M 40 Mps 0.1 to multiplier
200 10 2000 m increase in nationalincome
Size of the multiplier determines how much the initial injection is applied
If consumers solve more thanspend size of multiplier will be small
Nominal
Real GDP
Xt
GDP Indenxumber ex 2005 GDP 2,857,630m Index 101.3 So RealGDP 2857630
101.3 10
