INTRODUCTION TO

MACROECONOMICS
LESSON 1
LECTURER: CAI YUN CHAO

Definition of Economics
Economics is the social science that studies the

choices that individuals, businesses, governments, and

entire societies make as they cope with scarcity.
All economic questions arise because we want more

than we can get.

Our inability to satisfy all our wants is called scarcity.
Because we face scarcity, we must make choices.

Macro & Micro

Macroeconomics
Examines either the economy as a whole or aggregates, such
as the government, general household, and business sections.

Economy-wide phenomena, including inflation,

unemployment, and economic growth

Microeconomics
The part of economics concerned with individual units such
as a person, a household, a firm, or an industry.

How households and firms make decisions and how they interact
in specific markets

Macroeconomics
Macroeconomics answers questions such as the

following:
Why is average income high in some countries and low in others?
Why do prices rise rapidly in some time periods while they are

more stable in others?

Why do production and employment expand in some years and
contract in others?

Scope of Macroeconomics & Microeconomics

Macroeconomics

Microeconomics

1. National Income (GDP)

1. Consumers behaviors

2. General Unemployment

2. Producers behaviors

3. Economic Growth

3. Price & output determination

4. Monetary Problems

4. Distribution

5. Business Cycles

5. Economic welfare

How the economy look like? ---circular flow

model
Includes two types of actors:
households
firms
Includes two markets:
the market for goods and services
the market for factors of production

Households:
Households:
own
own the
the factors
factors of
of production,
production,
sell/rent
sell/rent them
them to
to firms
firms for
for income
income
buy
buy and
and consume
consume goods
goods &
& services
services
Firms
Firms:
Firms:
buy/hire
buy/hire factors
factors of
of production,
production,
use
use them
them to
to produce
produce goods
goods
and
and services
services
sell
sell goods
goods &
& services
services

Households

Two Sector Circular-Flow Model

MARKETS
FOR
GOODS AND SERVICES
Firms sell
Goods
Households buy
and services
sold
Revenue

FIRMS

Wages, rent,
and profit

Goods and
services
bought

HOUSEHOLDS
Buy and consume
goods and services
Own and sell factors
of production

Produce and sell

goods and services
Hire and use factors
of production

Factors of
production

Spending

MARKETS
FOR
FACTORS OF PRODUCTION
Households sell
Firms buy

Labor, land,
and capital
Income
= Flow of inputs
and outputs
= Flow of dollars

Three Sector Circular-Flow Model

MARKETS
FOR
GOODS AND SERVICES

Revenue

Spending

Goods and
services
bought

Goods
and services
sold

TAX

TAX

FIRMS
Government
Spending

Factors of
production
Wages, rent,
and profit

HOUSEHOLDS

GOVERNMENT

MARKETS
FOR
FACTORS OF PRODUCTION

Government
Spending

Labor, land,
and capital

Income
= Flow of inputs
and outputs
= Flow of dollars

Four Sector Circular-Flow Model

Revenue

MARKETS
FOR
GOODS AND SERVICES

Spending

Goods and
services
bought

Goods
and services
sold

TAX

TAX

FIRMS

GOVERNMENT
GOVERNMENT
SPENDING

Factors of
production

HOUSEHOLDS
GOVERNMENT
SPENDING

MARKETS
FOR
FACTORS OF PRODUCTION

Wages, rent,
and profit

Labor, land,
and capital

Income

IMPORT

ABROAD
EXPORT

IMPORT

The Circular
Flow Of Money

Revenue

MARKETS
FOR
GOODS AND SERVICES

Spending

FIRMS

HOUSEHOLDS
Wages, rent,
and profit

MARKETS
FOR
FACTORS OF PRODUCTION

Income

EXPORT

TAX
GOVERNMENT
SPENDING

IMPORT

INVESTMENT

GOVERNMENT

GOVERNMENT
SPENDING

TAX

ABROAD

BANK

IMPORT

SAVING

The Circular Flow Of Money

Withdrawals / Leakages
net saving
net taxes
import expenditure

Injections
investment
government expenditure
export expenditure