Macroeconomics IB
Macro-Economics
What is Macroeconomics?
Macroeconomics studies the behaviour of the entire economy, and how resources are allocated. It examines economy – wide phenomena such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price levels.
Macroeconomics deals with 5 variables:
Variable
Macroeconomic objective
Economic growth
A steady rate of increase of national output
Employment
A low level of unemployment
Price stability
A low and stable rate of inflation
External stability
A favourable balance of payments position
Income distribution
An equitable distribution of income
Circular flow of income model
Figure 1 Two sector circular flow of income model
This is the basis for the circular flow of income two-sector model shown above. Households provide the factors of production, and receive income. They buy the goods and services, produced by the firms using the income received, and in this way the income circulates throughout the economy. The factors of production provided and income received are shown in the table below:
Factor of production (provided by firms)
Payment to the factor (provided by households)
Land
Rent
Labour
Wages
Capital
Interest
Entrepreneurship
Profits
Leakages and Injections
Figure 2 Four-sector circular flow with leakages and injections
Even the four-sector model remains a simplification of a complex economy, but it serves to illustrate some important conclusions. The economy is in equilibrium where leakages are equal to injections. If the leakages rise, without a corresponding increase in injections, then national output will fall to a new equilibrium, as there will be less income circulating. If injections rise with no corresponding rise in leakages, then the economy will move to a new equilibrium.
National Income
National income is most commonly measured by the Gross Domestic Product (GDP). There are 3 different methods that
What is Macroeconomics?
Macroeconomics studies the behaviour of the entire economy, and how resources are allocated. It examines economy – wide phenomena such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price levels.
Macroeconomics deals with 5 variables:
Variable
Macroeconomic objective
Economic growth
A steady rate of increase of national output
Employment
A low level of unemployment
Price stability
A low and stable rate of inflation
External stability
A favourable balance of payments position
Income distribution
An equitable distribution of income
Circular flow of income model
Figure 1 Two sector circular flow of income model
This is the basis for the circular flow of income two-sector model shown above. Households provide the factors of production, and receive income. They buy the goods and services, produced by the firms using the income received, and in this way the income circulates throughout the economy. The factors of production provided and income received are shown in the table below:
Factor of production (provided by firms)
Payment to the factor (provided by households)
Land
Rent
Labour
Wages
Capital
Interest
Entrepreneurship
Profits
Leakages and Injections
Figure 2 Four-sector circular flow with leakages and injections
Even the four-sector model remains a simplification of a complex economy, but it serves to illustrate some important conclusions. The economy is in equilibrium where leakages are equal to injections. If the leakages rise, without a corresponding increase in injections, then national output will fall to a new equilibrium, as there will be less income circulating. If injections rise with no corresponding rise in leakages, then the economy will move to a new equilibrium.
National Income
National income is most commonly measured by the Gross Domestic Product (GDP). There are 3 different methods that