Intro to Macroeconomics Flashcards
What is Circular flow of income?
The Circular flow of income is a theoretical model for understanding the workings of an economy. It illustrates the flow of money as well as goods and services between the 4 sectors - Households, Firms, Government, and Foreign sectors, in an economy. It shows how these different economic agents are inter-related and how a country arrives at a certain level of national output, national expenditure, and national income.
What are the two involved principles in the circular flow of income?
i) In every economic transaction or exchange, the seller receives exactly the same amount that buyer spends
ii) For every real (Goods and services) flow in one direction, there is a corresponding money (payment) flow in the other direction
What does the 4-sector economy consist of?
i) Households
ii) Firms
iii) Government
iv) Foreign sector
What are Withdrawals (W)?
Withdrawals refer to any part of household income that is not spent on goods and services produced by the domestic firms. The effect of any withdrawals is to cause the flow of income to contract or diminish
W=S+T+M
What are Injections (J)?
Injections (J) refer to expenditure on domestic output that do not arise from domestic households. The effect of any injections is to cause the flow of income to expand
J=I+G+X
What are the three methods of measuring circular flow of income?
i) Expenditure method
ii) Output method
iii) Income method
What is the Expenditure method?
The Expenditure method measures the total amount of spending by consumers, firms, government and foreigners on the final output produced within the economy in a specified time period, usually a year
What is the Output method?
The Output method measures the total value of final output of goods and services produced within the economy in a specified time period, usually a year
What is the Income method?
The Income method measures the total income earned from all factors of production producing the final output within the economy in a specified time period, usually a year
What is the definition of Aggregate Demand (AD)?
The Aggregate Demand (AD) curve gives the total demand for a country’s output at various general price levels, ceteris paribus
What is Consumption Expenditure (C)?
Consumption is spending by households on consumer goods and services.
This spending covers non-durable goods (e.g. food), durable goods (e.g. cameras and cars) and services (e.g. entertainment, transport)
What are the determinants of Consumption (C)?
i) Size of Disposable Income of the Households (Affected by Direct Tax and Transfer Payment)
ii) Households Net Wealth
iii) Income Distribution
iv) Interest Rates and Availability of Credit
v) Consumers’ Confidence - Expectations about Employment, Prices and Income
vi) Invention of New Consumer Goods and the Influence of Advertising
vii) Tastes and attitude towards saving
How do you determine Household Disposable Income (Yd) ? (equation)
Household disposable income = Personal Income + (Transfer payments - Personal income taxes)
What is Investment Expenditure?
Investment is the acquisition of new fixed capital goods (including housing, plant and machinery) and accumulation of inventory stock (raw materials, semi-finished goods and finished goods held by the producer).
What are investment decisions generally based on?
i) The expected rate of return on the investment (MEI);
ii) The cost of the investment (Interest rate); and
iii) Profits and other costs of production incurred by the firm
