A summary of the entirety of Theme 2 of the Edexcel/Pearson A Level economics specification. Based on the book 'Edexcel AS/A level Economics, 6th Edition' by Alain Anderton. A* Grade Analysis & Evaluation points included. Includes all necessary diagrams and variations, with short explanations. Deta...
Macroeconomic Essentials
Background:
The foremost single measure of how an economy performs is the aggregate
level of income, or aggregate output, or aggregate expenditure, which ALL
MEAN THE SAME THING.
Incomes are paid out to factors of productions, which are employed by firms
to produce goods and services.
This output then reaches the market for people to buy, and this works as a
cycle.
However firms way not use all available production factors to produce output,
and therefore factors of production are left idle as unemployment.
Also people may not buy all the goods and services available and there will be
an excess supply.
Nominal figures are ones that have been converted into a common
currency to make them comparable.
ENDOGENOUS Variables are ones that change due to a relationship within a
model. They can be viewed as dependent variables. This type of variable is
generally predictable in change, with respects to changes in other variables.
An example is the equilibrium price of a good from supply and demand.
EXOGENOUS Variables are ones that affect a model of some sort, WITHOUT
being affected by it. They are outside of the model.
For example say tax paid is modelled by Tax (t) = 0.3 x Income (Y)
Here, t is endogenous and Y is exogenous.
Circular Flow of Income:
The inner circle shows that households grant
firms with the production factor of labour.
In turn they consume goods with their labour
income.
This is called the Barter Economy.
The outer circle shows that the inner real flow
of labour and goods is financed by a monetary
flow of income payments from firms to
households and then the spending of
households’ income payments on the firms’
goods.
If households save part of their income then there is a leakage from the
circular flow. Taxation is also a leakage.
Similarly, investment (firms increasing their productive capacity NOT
stocks/shares etc) will be an injection into the circular flow.
Exports are also injections, whilst imports are leakages.
Govt. Expenditure is an injection, such as transfer payments.
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