Economics Study Guide

Economics

It is the study of how society chooses to allocate its scarce resources to the production of goods & services in order to satisfy unlimited wants.

+ economics: analysis limited to statements that are verifiable

normative economics: analysis based on value judgement

Macro

Branch of economics that studies decision making for the economy as a whole

Eg. A bigger picture (forest)

Micro

Branch of economics that studies decision making by a single economic unit, individual, household, firm, industry, level of govt (6)

Eg. A smaller picture (trees) → specifically

4 Macroeconomic Goals ***

1. a steady growth of national output
2. high level of employment
3. stable price level
4. satisfactory balance-of-payments

steady growth of national output

• output = income
• growth rate has to be sustainable → so as to not disappoint ppl
• steady growth implies higher sales & revenue to biz
• in the circular flow model, higher sales means higher income for households
• results to better standard of living

high level of employment

• means more jobs are created in a country, more ppl employed
• benefit from receiving income from jobs
• higher income, better standard of living
• however, we measure unemployment rate

stable prices

• helps maintain the purchasing power → ability to buy things (FOR PPL)
• helps to remove uncertainties (unpredictability) → (FOR BIZ)

satisfactory BOP

• refers to country’s transactions with other countries
• satisfactory BOP = country in good financial condition
• transactions thru:

1. trade
2. direct foreign investment
3. financial transaction

Factors of production

• land (natural resources)
• labour (workers)
• capital → man-made goods used for production (machinery, eqpt)
• entrepreneurship → special type of labour (mktng & management)

Factors of payment

• land: rent
• labour: salary
• capital: interest
• entrepreneurship: profts

output = income = expenditure

net exports= exports - imports

4 sectors of an open economy

• households
• businesses
• government
• foreign sector

Circular Flow of Income

• refers to the flow of goods & services (including financial assets & factor services) & payments in the economy

2-sector circular flow model

• households
• businesses
• has  4 items in the diagram

• real side(CW) of the economy, g&s flow from firms → households
• monetary side(ACW) of the economy, payments for factors of production eg wages, rent, interest, profits flow from firms → households

• real side(CW) of the economy, FOP flow from households → firms eg land, labour, capital, entrepreneurship
• monetary side(ACW) of the economy, expenditure of g&s from households → firms

4-sector circular flow model

• households
• businesses
• government
• foreign
• has 7 items in the diagram

GDP (Gross Domestic Product)

• it is the market value of all final goods & services in a nation during a period of time (usually 1 year)
• intermediate goods not included

Expenditure Approach*

GDP = C(from homes) + I(from biz) + G(from govt) + (X-M)

Income Approach

GDP = rent + wages + interest + profit