What are the 4 sectors (stakeholders) in an economy?
Households (domestic)
Firms (domestic)
Government (domestic)
Foreign (foreign hhs, firms & gov)
Definition of injections
Refers to any payment of income to domestic firms that do not arise from domestic households, but are additional spending generated by other sectors of the ecy.
What do injections into an economy come in the forms of?
Exports (X revenue)
- dom firms earn revenue from hhs, firms and govs in other ctys through exports.
Investment
- acquisition of new capital gds. creates revenue for dom firms that manufacture capital equipment
Government expenditure
- govs purchase g&s from firms; and also need to spend on the wages of civil servants
Definition of withdrawals
also known as Leakages,
Refers to any part of a household’s income that is not spent on domestically-produced g&s, but leaves the circular flow of income.
What do withdrawals from an economy come in the forms of?
Imports (M expenditure)
- hhs buy g&s from abroad
Net savings
- some of hhs’ Ys are saved
Net taxes
- compulsory payments to the gov not for gds provided or services rendered
What is AD?
Refers to the quantity of domestically-produced g&s that hhs, firms, gov and foreigners are w&a to buy at each possible GPL
Written as
AD = Cd + Id + Gd + Xd
or
AD = C + I + G + (X-M)
Determinants of consumer expenditure
- Income (Y-induced C)
- Wealth
- Taxes and transfers
- —> disposable Y is the earnedY minus direct taxes and transfers
- Expectations of future prices and Y
- Cost and availability of credit
- Distribution of income
Determinants of investment
investment = fixed capital formation + changes in inventories
- Business confidence and expectations
- Gov policies
- Costs and efficiency of capital equipment
- Cost and availability of credit
Recall MEI & its graph
Determinants of government expenditure
- For macroeconomic stabilisation
- For sustained and sustainable growth
- Gov SPENDING for social objectives (e.g. merit and public gds)
- —> gov SPENDING can be classified as:
(i) gov exp on final g&s [which consists of gov consumption exp e.g. payment of civil servants; and gov investment e.g. construction of new highway, etc.
(ii) transfer payments [which shows up as Cd in the circular flow]
Determinants of net exports
- Foreign Y & Dom Y
- Relative prices [depending on i/r & exr)
- T&Ps
- Gov policies
What is AS?
Refers to the quantity of domestically-produced g&s that firms are w&a to supply at each possible GPL
Curve: Keynesian range (horizontal) Intermediate range (upward-sloping) Classical range (vertical)
Determinants of AS
- uCOP: affects AS in SR
- Factor Q&Q : affects AS in LR
Factors that affect both AD & AS
Investment
- capital accumulation
- addition to the ecy’s stock of physical capital (one of the FOPs)
Gov spending [development expenditure]
- education/training (human capital/skills/pdtivity)