MACROECONOMICS LEARNING UNIT 1
PRODUCTION, INCOME AND SPENDING
Main participants in an open economy
Households
Firms
Government
Foreign sector
Main markets are:
Goods and services markets
Factor markets
Financial markets
Three major flows
Production – point of production is to satisfy consumer demands.
Income
Spending
Economic process: Households own the factors of productions, they sell these factors of productions
to the firms who use them to produce good and services, in return the households receive income.
Households use their income to spend of goods and services.
STOCKS AND FLOWS
Flows – has a time dimension and can be measured over a period,
(income).
Stock- has no time dimension and can only be measured at a specific moment, (wealth).
THE INTERDEPENDENCE BETWEEN HOUSEHOLDS AND FIRMS
Firms- make goods and services that consumers demand by utilising the factors of production the
transformation process.
o Productive units in economy
o Decide how goods are produced through pricing mechanisms.
o Operates with a sole purpose of making profit.
THE ACT OF PURCHASING CAPITAL GOODS IS CALLED INVESTMENT OR CAPITAL FORMATION
Markets:
Goods market – is a single market for all goods and services.
o Firms sell the good and services though the goods market.
,Factor markets- the scarce resources required by the firms to produce the goods, are purchased
from the households on the factor market.
Income earned by the owners of the factors of production are :
o Land/ natural resources = rent
o Labour / human resources=wages
o Capital= interest
o Entrepreneurship= profit
FINANCIAL MARKET – acts as a link between households and firms with surplus funds (savings) and
ither participants who need funds (investment).
SPENDERS IN THE CIRCULAR FLOW OF A MIXED ECONOMY
Sources of spending
1. Households
All the people who live together make joint economic decisions.
Basic decision-making unit.
Aim to maximise satisfaction.
Called CONSUMPTION
2. Firms
Engaged in production.
Firms aims to maximise profit.
Firms purchase capital goods, and this is called CAPITAL FORMATION OR
INVESTMENT
3. Government
4. Foreign sector
GOVERNMENT IN THE CIRCULAR FLOW
Primary function of government Is to establish
a framework within which the economy
operates.
3 important government flows
Government expenditure
Taxes
Transfer payments
, Transfer payments – A payment which is made for which no productive service is rendered,
an example= child grants.
INTRODUCING THE FOREIGN SECTOR
Once the foreign sector is included the model represents an OPEN economy.
The foreign sector consists of all countries and institutions outside the borders of a
country.
Economic links between countries have become stronger, this is referred to as
globalization.
Various flows between one country and other countries = International Trade and are
recorded in the BALANCE OF PAYMENTS
The model at this stage focuses only on:
EXPORTS
IMPORTS
Main functions of financial sector
- Financial markets channel funds from surplus units to deficit units.
Financial institutions, operating in these markets, fit into the circular flow as links between lenders
and borrowers.
- Financial institutions examples, central bank, commercial banks, insurance companies, pension
funds, unit trusts, finance companies.
NB!! KNOW THE DIFFERENCE BETWEEN THE CIRCULAR FLOW OF GOODS AND
SERVICES AND CIRCULAR FLOW OF INCOME AND SPENDING. TEXT BOOK
FIGURE 3-3 AND 3-4
TOTAL PRODUCTION, INCOME AND SPENDING REVISITED
Total spending or aggregated expenditure can be calculated by:
C + I + G + (X-Z)
C = Consumption spending by households
I = Investment spending by firms (Capital formation)
G = Government spending
X = Receipts for exports
Z = Spending for imports
LEAKAGES AND INJECTIONS
M
k
Leakages –
u Savings, taxes and payment for imports
decreases Bring money into government and they spend everywhere.
economic activity.
- Money out of circular flow
PRODUCTION, INCOME AND SPENDING
Main participants in an open economy
Households
Firms
Government
Foreign sector
Main markets are:
Goods and services markets
Factor markets
Financial markets
Three major flows
Production – point of production is to satisfy consumer demands.
Income
Spending
Economic process: Households own the factors of productions, they sell these factors of productions
to the firms who use them to produce good and services, in return the households receive income.
Households use their income to spend of goods and services.
STOCKS AND FLOWS
Flows – has a time dimension and can be measured over a period,
(income).
Stock- has no time dimension and can only be measured at a specific moment, (wealth).
THE INTERDEPENDENCE BETWEEN HOUSEHOLDS AND FIRMS
Firms- make goods and services that consumers demand by utilising the factors of production the
transformation process.
o Productive units in economy
o Decide how goods are produced through pricing mechanisms.
o Operates with a sole purpose of making profit.
THE ACT OF PURCHASING CAPITAL GOODS IS CALLED INVESTMENT OR CAPITAL FORMATION
Markets:
Goods market – is a single market for all goods and services.
o Firms sell the good and services though the goods market.
,Factor markets- the scarce resources required by the firms to produce the goods, are purchased
from the households on the factor market.
Income earned by the owners of the factors of production are :
o Land/ natural resources = rent
o Labour / human resources=wages
o Capital= interest
o Entrepreneurship= profit
FINANCIAL MARKET – acts as a link between households and firms with surplus funds (savings) and
ither participants who need funds (investment).
SPENDERS IN THE CIRCULAR FLOW OF A MIXED ECONOMY
Sources of spending
1. Households
All the people who live together make joint economic decisions.
Basic decision-making unit.
Aim to maximise satisfaction.
Called CONSUMPTION
2. Firms
Engaged in production.
Firms aims to maximise profit.
Firms purchase capital goods, and this is called CAPITAL FORMATION OR
INVESTMENT
3. Government
4. Foreign sector
GOVERNMENT IN THE CIRCULAR FLOW
Primary function of government Is to establish
a framework within which the economy
operates.
3 important government flows
Government expenditure
Taxes
Transfer payments
, Transfer payments – A payment which is made for which no productive service is rendered,
an example= child grants.
INTRODUCING THE FOREIGN SECTOR
Once the foreign sector is included the model represents an OPEN economy.
The foreign sector consists of all countries and institutions outside the borders of a
country.
Economic links between countries have become stronger, this is referred to as
globalization.
Various flows between one country and other countries = International Trade and are
recorded in the BALANCE OF PAYMENTS
The model at this stage focuses only on:
EXPORTS
IMPORTS
Main functions of financial sector
- Financial markets channel funds from surplus units to deficit units.
Financial institutions, operating in these markets, fit into the circular flow as links between lenders
and borrowers.
- Financial institutions examples, central bank, commercial banks, insurance companies, pension
funds, unit trusts, finance companies.
NB!! KNOW THE DIFFERENCE BETWEEN THE CIRCULAR FLOW OF GOODS AND
SERVICES AND CIRCULAR FLOW OF INCOME AND SPENDING. TEXT BOOK
FIGURE 3-3 AND 3-4
TOTAL PRODUCTION, INCOME AND SPENDING REVISITED
Total spending or aggregated expenditure can be calculated by:
C + I + G + (X-Z)
C = Consumption spending by households
I = Investment spending by firms (Capital formation)
G = Government spending
X = Receipts for exports
Z = Spending for imports
LEAKAGES AND INJECTIONS
M
k
Leakages –
u Savings, taxes and payment for imports
decreases Bring money into government and they spend everywhere.
economic activity.
- Money out of circular flow
