Essay about Macroeconomics

2008 Words9 Pages
You may have already studied microeconomics, which looks at supply, demand and prices for individual goods. Macroeconomics looks at the bigger picture and involves the study of the economy as a whole.
National income
Let us start by looking at a simple example - a
'two sector' economy made up of households
(consumers) and firms (producers) -and use this to develop the idea of national income. To start with we will ignore the impact of government policy and overseas sectors.
Households ultimately own the factors of production, e.g., labour, materials and capital, and supply these factors to firms who use them to produce goods and services. In return households earn rewards for supplying the firms with the factors of
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This model will use the following definitions: Consumption (C) - consumption goods produced and sold to customers i.e., the chairs.
Savings (S) - income that is not spent on consumption. Investment (I) - production of, or expenditure on, non-consumption goods (carried out by firms) including expenditure on increasing stocks of consumption goods.
Injections - expenditure on domestic output not originating from consumers e.g., investment.
Leakages - income not spent on consumption of domestic output e.g., savings.
Consumers will not spend all their income on goods and services. They will also have savings - income not spent on consumption. Similarly producers will not just spend on producing goods but will also carry out investment - expenditure on non-consumption goods.
There are therefore injections into (investment) and leakages from (savings) the circular flow.
These injections and leakages can now be added to the circular flow model (see Figure 2)
Figure 2

Notes to Figure 2
In this model the income earned by households (Y) must be equal to expenditure on purchasing national product (E). Output of consumption goods by firms equals consumption expenditure by household's (C). Note that households do not spend all their income - instead they save (S) - a leakage. Expenditure on non-consumption goods by firms is investment (I) - an injection.
Income (Y) = Expenditure (E)

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