Macro-economics

Economics

The study of choices people make to satisfy

their unlimited wants and needs.

Macro-economics – the study of choices made

by countries or governments to satisfy their
unlimited wants and needs
 3 Types of Economies

Traditional
Command
Market
Free Enterprise
 5 Features of Free Enterprise

1. The right to own private property and

enter into contracts
2. Make individual choices
3. Engage in economic competition
4. Make decisions based on self-interest
5. Participate in the economy with limited
government involvement and regulation
 U.S. Economic Goals

1. Freedom (Choice)
2. Efficiency (make best use of scarce resources)
3. Equity (fairness)
4. Security (protect the economy from situation that
would harm the economic well being of
individuals and the nation)
5. Stability (full employment and stable prices)
6. Growth (increase the amount of goods and
services produced)
The Circular Flow Model
 Stable Economy

If all income is spent

business will sell all goods, and
will be induced to produce all goods again
Circular Flow - Simple Model
Resource Income
$$$
Productive Services

Businesses Households

Goods and Services

$$$
Spending for Goods and Services

Circular Flow Movie

 Circular Flow of Goods and Services

Money Payments

Taxes

services Products

Product Market – all

of the goods and
services exchanged in
the economy

Money payments

Products
Circular flow
 Circular Flow of Goods and Services

Services
Labor

Money Payments
Taxes
Resource Market –
Exchange of resources
between households
and the users of
resources (businesses
and government)

Labor

Income
Circular flow
 Leakages and Injections

Leakages in the circular flow

savings
taxes
Injections in the circular flow
investment
government spending
 Flow with Leakages/Injections
Resource Income

Loanable
Businesses Investment Funds Saving Households

Spending Government Taxes

Spending for Goods and Services

 Government and the Circular Flow
•Balanced budget:
– amount spent by government = amount collected in
taxes
•Surplus budget
– amount spent by government = less than that collected
in taxes
•Deficit budget
– amount spent by government = more than that collected
in taxes
International Trade and the Circular
Flow
IMPORTS are a leakage
EXPORTS are an injection
If exports = imports, the circular flow is in
balance
Usually it is not balanced
called a trade deficit, because imports
(leakages) are greater than exports (injections)
 The Circular Flow Diagram
• The circular-flow diagram presents a
visual model of the economy as
coordinated by the four key markets.
• First, the resource market (bottom loop)

coordinates the actions of businesses

demanding resources and households
supplying them in exchange for
income.
• Second, the goods & services market

(top loop) coordinates the demand

(consumption, investment, government
purchases, and net-exports) for and
supply of domestic production (GDP).
• Third, the foreign exchange market
(top right) brings the purchases
(imports) from foreigners into balance
with the sales (exports plus net inflow of
capital) to them.
• Fourth, the loanable funds market

(lower center) brings the net saving of

households plus the net inflow of
foreign capital into balance with
the borrowing of businesses and
governments.

© by Harcourt, Inc
Used by permission
 Government’s Goal

Make decisions that improve the economy

Measure the economy to see how it’s doing
Business Cycle – ups and downs of the
economy
● Helps experts predict what will happen to the
economy
 Business Cycle

Four phases: Phase 2

Boom Period

Phase 1
Phase 3
General Prosperity Slow Down
Phase 4

Recession

Depression
 Business Cycle

Phase 1 – General Prosperity

Economy going up
People buying more goods and services
Businesses producing more goods and
services and hiring more employees
 Business Cycle

Phase 2 – Boom Period

Economic activity at a peak
Businesses working and selling at full
capacity
 Business Cycle

Phase 3 – Slow Down

People buying fewer goods and services
Businesses cutting back production and laying
off workers; some forced out of business
 Business Cycle

Phase 4 – Recession
Production at lowest point
High unemployment
Reduced spending on goods and services

● Depression – severe recession

 Business Cycle

Fiscal Policy – the way government taxes

citizens and spends money
Recession – gov’t spends more money or cuts
taxes
● Defense
● Roads
● Public housing
 Business Cycle

Monetary Policy – the way the government

regulates the amount of money in circulation
(Federal Reserve System)
Raises and lowers interest rates
 Measuring Economic
Performance
How many people are working this month?
How much did consumers spend last year?
How much money did the steel industry make last year?

Answers to these question are called:

Economic Indicators
Because they indicate how the economy is performing
 Gross Domestic Product
(GDP)
Most important indicator:
Total value of all the goods and services
produced within the nation each year
● All cars, planes, tv’s, shoes, and so on in this country
● All the money spent on doctors, lawyers, car repairs,
restaurant meal and so on in this country
Final versus Intermediate Goods

Final Goods and Services

Manicures
Bread
Final versus Intermediate Goods

Intermediate Goods

Window glass in new automobiles

Lumber in a new house
Screws used in a cruise missile
Flour for making bread
Cloth for making dresses
 GDP consists of three parts

consumer goods and services, government purchases of

goods and services, and investment goods.

C = family (household) spending on consumer goods

and services
G = government purchases of goods and services
I = spending by firms and households on new capital
such as factories, tools, inventory increases or decreases,
and new houses
Gross Domestic Pizza Activity
 Other Indicators

Personal Income – before taxes

Disposable Income – after taxes

Indicates the “Standard of Living”

 Inflation

General rise in the price of goods and services

Demand Prices

EFFECT - prices rise money buys less =

Decrease in the standard of living
 Attempts to control inflation

Raise interest rates = more expensive to borrow

money
Raise taxes and cutting spending = decrease in the
amount of money in circulation
Businesses supply more than demand = price
drops
Consumers save more than they spend = price
drop