Macroeconomics Flashcards
Circular flow of income in a closed economy w/o government
Households offer factor inputs -> households earn income -> households save/spend income on goods & services from firms that hire labour, capital and benefit from investment
Injection of investment and leakage of savings
Circular flow of income in a closed economy w/ government
Households offer factor inputs ->
households earn income ->
household gets taxed ->
households spend income on goods & services from firms that hire labour, capital and benefit from investment + subsidies
Injection of investment (I) + subsidies (G) and leakage of savings (S) + tax (T)
Circular flow of income in open economy
Households offer factor inputs ->
households earn income ->
household gets taxed ->
households spend income on goods & services from imports + firms that hire labour, capital and benefit from investment + subsidies + exports
Injection of investment (I) + subsidies (G) + exports (X) and leakage of savings (S) + tax (T) + imports (M)
Value added by firms
- Payment of wages and rental cost of capital
- Interest paid to households for savings that were lended to the firms for investment
- Supernormal profits for households that own the firms (after selling final goods)
Equilibrium
Aggregate Income = Aggregate Expenditure
Value added formula
Sales - Purchase from Other Firms
GNP = sum of individuals value added
GDP
Y (aggregate output) = Aggregate Demand
C (consumption) + I (invesment) + G (gov spending) + (X - M) aka NX
National Income Identity
Y (aggregate income) = C (consumption) + S (savings) + T (tax)
Injection and Savings equilibrium in closed economy w/o government
Y (aggregate output) = Aggregate Demand
C + S = C + I
S (private savings) = I (investment)
Injection and Savings equilibrium in closed economy w/ government
Y (aggregate output) = Aggregate Demand
C + S + T = C + I + G
S + (T - G) = I
National Savings = Invesment
Injection and Savings equilibrium in open economy
Y (aggregate output) = Aggregate Demand
C + S + T = C + I + G + NX
(S - I) + (T - G) = NX
Private savings + Public Savings = Net Exports
Nominal GDP and Real GDP
Nominal: measured at current prices
Real: measure at constant prices
Real GDP = Nominal GDP / (Deflator/100)
Multiplier
Magnitude of equilibrium output change due to change in aggregate demand from consumer behaviour, taxation and imports
1/[1-c(1-t)+z]
Fiscal Policy (Government)
Monetary Policy (Central Bank)