Macro-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

Economics

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

Businesses Households

Goods and Services

Productive Services

Spending for Goods and Services

Resource Income

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Circular Flow - Simple Model

Circular Flow Movie

Circular flow

Product Market – all of the goods and services exchanged in the economy

services

Money payments

Products

Products

Taxes

Money Payments

Circular Flow of Goods and Services

Circular flow

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

Money Payments

Labor

Income

Taxes

LaborServices

Circular Flow of Goods and Services

Leakages and Injections

Leakages in the circular flow

savings

taxes

Injections in the circular flow

investment

government spending

Businesses Households

Spending for Goods and Services

Resource Income

GovernmentSpending Taxes

Loanable Funds SavingInvestment

Flow with Leakages/Injections

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.

• 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.

• 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.

• Second, the goods & services market (top loop) coordinates the demand (consumption, investment, government purchases, and net-exports) for and supply of domestic production (GDP).

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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 1

General Prosperity

Phase 2

Boom Period

Phase 3

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

ManicuresBread

Cruise missileNew factory

DressesIncrease in automobile inventory

Final versus Intermediate Goods

Intermediate Goods

Window glass in new automobilesLumber in a new houseScrews used in a cruise missileFlour for making breadCloth 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