Macro Economics 1

Macro-Economics notes:Goals of the government: Price stability Economic Growth Balanced current account (money coming in VS money going out of the country) Full employment Key Macro economics indicators: the inflation rate changes in real GDP The current account balance The unemployment rate Savings and investments: Savings is income not spent i.e. buying shares, term deposit Financial institutions use household savings as loans to firms for investments Investment=adding to the stock of capital goods therefore, the level of investment depends on the level of savings, the state of the economy, business confidence and interest rates Banks depend on household savings because they are the funds they use to lend out to firms for investment in capital goods. If savings are low, then banks must borrow from overseas to provide funds for firms. Withdrawals (leverages): money taken out of the circular flow e.g. savings, taxes, import payments. They reduce the level of demand in the economy.Injections: Money put into the circular flow e.g. investments, government spending, export receipts. They will increase the level of demand in the economy (transfer payments are not strictly injections).Limitations of circular flow: Not all flows are shown distinction between flows are not always straight forward Changes in the price level are ignored Gross domestic product (GDP):GDP= The market value of all the final goods and services produced by an economy in a year.There are three approaches to measuring GDP: Expenditure method Income method Production method (not assessed) Expenditure approachThis is the sum of the value of purchases of all final goods and services produced in the economy. GDP=C+I+G+R+(X-M)+Stat discrepancy (balancing item)C= Consumer spendingI= Investment spending by firms and governmentG= Final consumption spending by governmentR= Changes in stocks/inventoriesX-M= Net exports (export receipts-import payments)