American Academy of English Macroeconomics Goals & Circular Flow of Income Questions


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Macroeconomics-Introduction: An overview
The word ‘Economics’ originates from the Greek words ‘Oikonomikos’ which can be divided into two
(a) ‘Oikos’, which means ‘Home’, and
(b) ‘Nomos’, which means ‘Management’.
Thus, Economics means ‘Home Management’. The head of a family faces the problem of managing
the unlimited wants of the family members within the limited income of the family. In fact, the same
is true for a society also. If we consider the whole society as a ‘family’, then the society also faces the
problem of tackling unlimited wants of the members of the society with the limited resources
available in that society.
Thus, Economics means the study of the way in which mankind organizes itself to tackle the basic
problems of scarcity. All societies have more wants than resources. Hence, a system must be devised
to allocate these resources between competing ends.
• The origin of Macroeconomics came ( from Greek word makros- meaning “large” and economics) is
a branch of economics dealing with the performance, structure, behavior, and decision-making of
an economy as a whole.
Basic macroeconomics concepts
What is macroeconomics?
• Macroeconomics is a branch of economics that deals with the performance,
structure, and behavior of a national or regional economy as a whole.
• It studies about aggregated indicators such as GDP, unemployment rates,
and price indices to understand how the whole economy functions.
• Develop models that explain the relationship between such factors as
national income, output, consumption, unemployment, inflation, savings,
investment, international trade and international finance.
Microeconomics Studies individual income
Macroeconomics Studies national income
Microeconomics Analyzes demand and supply of labour
Macroeconomics Analyzes total employment in the economy
Microeconomics Deals with households’ and firms’ •
Microeconomics Studies individual prices
Macroeconomics Studies overall price level
Microeconomics Analyzes demand and supply of goods
Macroeconomics Analyzes aggregate demand and aggregate
Macroeconomics Deals with aggregate decisions
Importance Of Economics
The economics is a social science and it’s important in our political life, daily life, social
life and economic life. It’s based on the pillar of a nation that who a country is
advancing in the economic area, who it is people, is developing in the economic area.
1. The economic activity is human being essential activity and predominant.
2. Laws of all society are the result of it is economic development and conditions.
3. People style of thinking in all society are the production of their economic
development and conditions.
Important Macroeconomics Indicators
Economic Growth:
An increase in economic activity, It is often measured as the rate of change of GDP. Negative growth is
associated with economic recession and economic depression. In other words economic growth is an
increase in the production of economic goods and services, compared from one period of time to another.
Gross Domestic Product (GDP):
Gross Domestic Product is the value of total goods and services produced within Oman by nationals
and foreign supplied resources. It is the value of final goods and services produced domestically within
the country either by citizens or by foreigners.
Gross National Product:
The market value of all final goods and services produced by a nation’s residents, no matter where
they are located in the country or outside. The GDP + what produced by the citizens of the country who
are working abroad – what produced by the foreigners who are working in the country.
National Income:
Total value of final goods and services produced by the nationals of the country for a particular period
of time, usually a year.
Full Employment:
F u ll e mp lo ymen t o ccu rs w h e n th e e c o n omy is p r o duc ing to its ma x imu m s u s taina ble
cap a c ity, u s in g lab o r, te c h n ology, la n d , c a p ita l a n d o th e r f a c to rs o f p r oduc tion to th e ir
f u llest p o tential. I n a s itu ation o f f u ll emp lo ymen t, so me w o r kers may still b e u n emp loyed
if th e y a r e temp o rarily b e tw e e n j o bs a n d s e a r c hing f o r n e w e mp lo yme n t ( th is is c a lle d
‘ f r ic tional u n emp loymen t’).
Inflation may be defined as a sustained increase in general price level of goods and services in the economy
Government policy:
All problems of economy will be control by the government. Hence, government would think the best policy that can be
taken to overcome any problems. There’s two policy commonly used in economics; monetary and fiscal policy.
Monetary policy:
Monetary policy is one of the tools used by national Government to influence its economy.
Using its monetary authority to control the supply and availability of money, a government attempts to influence the
overall level of economic activity in line with its political objectives.
Usually this goal is “macroeconomic stability” – low unemployment, low inflation, economic growth, and a balance of
Fiscal Policy:
The term fiscal policy refers to the expenditure a government undertakes to provide goods and
services and to the way in which the government finances these expenditures.
T h e f i s c a l p o l i c y t o o l s a r e t a x e s ( t ) a n d g o v e r n m e n t e x p e n d i t u r e ( g ).
Aggregate Demand:
Aggregate demand is the total demand for final goods and services in the economy (Y) at a
given time and price level. It is the amount of goods and services in the economy that will be
purchased at all possible price levels.
Aggregate Supply
Aggregate Supply (AS) measures the volume of goods and services produced within the
economy at a given overall price level. There is a positive relationship between AS and the
general price level.
Macroeconomic Objectives:
The objective of macroeconomic policies is to maximize the level of
national income, providing economic growth to raise the utility and
standard of living of participants in the economy. There are also a number
of secondary objectives which are held to lead to the maximization of
income over the long run.
• Full employment: (of resources) keeping unemployment close to its natural rate – economic efficiency
through employment of available resources in most productive channels.
• Stability of prices: The instability of prices (inflation) lead to inequality in income distribution also it
affects negatively output, consumption and international trade.
• External Balance: It means equilibrium in the balance of payment – attaining balance of trade with the
rest of the world that should be closed to zero + stable exchange rate.
• Internal Balance: This means balance in the government budget, i.e. to avoid deficit in government
• Economic Growth: This will be attained by increasing output through investments.
• Increasing productivity – more output per unit of labour per hour. Also, since labor is but one of many
inputs to produce goods and services, it could also be described as output per unit of factor inputs per hour.
• En. Amir B. Jusoh (Lecturer)
• Macroeconomics: An Introductory Text by-John Evans-Pritchard B.Sc. Econ ISBN: 978-0-33337407-8 (Print) 978-1-349-17926-8 (Online)
• Introductory economics (micro and macro) [electronic resource] : A textbook by-Subhendu
Dutta. Dutta, Subhendu. Part B Peg No 91-159
? Principles of Macroeconomics
?The Circular Flow of Income and Expenditure
? Circular flow refers to a simple economic model which describes the reciprocal
circulation of income between producers and consumers. In the circular flow
model, the inter-dependent entities of producer and consumer are referred to as
“firms” and “households” respectively and provide each other with factors in
order to facilitate the flow of income.
? The circular can be explained through different models.
? 1-Simple model (closed economy model):
? In this model the economy is composed of only two sectors, households and firms.
? Here households *Supply factors of production to firms
*Buy consumption goods and services from firms
* Pay money for goods and services.
* Supply goods and services to household.
*Buy factors of production from household.
* Pay for factors of production (w, r, R, ?)
Buying and payments are completed through markets
– Market for goods and services
– Markets for factors of production.
Revenue (=GDP)
Markets for
Goods &
Factors of
Wages, rent,
profit (=GDP)
Spending (=GDP)
Markets for
Factors of
Labor, land,
Income (=GDP)
We have two kinds of flows occur between households and firms:
? First:
The real flows from households to firm which are the services of factors of
production (lab our, capital, land, and management)
The real flows from firms to households which are goods and services. This is
called National product.
? Second:
Money flows that firms pay to household in terms of wages for lab our (w),
interest for capital (r) and rent for land (R) and profit for owners of firms (II).
Money flows that households pay to the firms for goods and services. This called
National income.
The payments that firms make to household in exchange for factors of
production are known as income. Household spend part of their income
in consumption of goods and services and this is called expenditure (c).
2- Complex Model:
It is complicated because we add the government sector and the capital market. In this model
the households do not spend all their income, they save some of it. So in this model of
economy, saving is the difference between household income and consumption (S= Y-C).
Saving goes to financial market. The financial markets give this saving to the business sector
as loans to be invested again in new firms so saving flow again in the circular. In this case to
be in equilibrium saving should be equal to investment (S = I).
In this model also the government sector imposes taxes on households and firms but in return
these taxes are transferred into public goods.
In this case taxes is equal to government expenditure, T = G. So the outcome of these
transactions is aggregate income and aggregate expenditure and value of output.
Agg Y = Agg C = value of output (GNP)
House Hold
? 3 -Open economy model
? In this model we add the foreign sector, as the flow of money
from the rest of the world to the firms for the purchase of exports
(x) and from the firms to the rest of the world for the purchase of
imports (M).
? So the sum of the flows into firms equal the sum of the flows out
that is:
? Y = C + I + G + (X-M) net exports
? Y = aggregate income C + I + G + (X-M) = expenditure on
domestic output.
House Hold
? Measurement of National Income
National Income
? The total monetary value of all final goods and services produced in a country for a year
is called National Income.
Concepts of National Income
Gross Domestic Product (GDP):
? Gross Domestic Product is the value of total goods and services produced within Oman
by nationals and foreign supplied resources. It is the value of final goods and services
produced domestically within the country either by citizens or by foreigners.
? Example: Goods produced by Japanese factory in Oman is a part of Oman’s GDP.
Income of Omanis working in other countries in excluded in GDP.
Gross National Product (GNP):
?The market value of all final goods and services
produced by a nation’s residents, no matter where they
are located in the country or outside. The GDP + what
produced by the citizens of the country who are working abroad
– what produced by the foreigners who are working in the
?What are final goods?
?Finished goods and services produced for the ultimate user.
?Example: income produced by Omanis working in U.S.A. is
included in GNP.
?The income of expatriates working in Oman is excluded in GNP.
Equation of GNP in an open economy:
GNP= C + I + G + (X – M) + (R – P)
In this equation,
C = Value of Consumer Goods
I = Value of Investment Goods (Machines)
G = Value of Government Services
X – M = Exports – Imports
R – P = Net Income earned from foreign countries
R = Receipt of the Government
P = Payments made by the Government.
? Equation of GNP in a closed economy
GNP = C + I + G
C = Consumer Goods
I = Investment Goods (Machines)
G= Value of all Government Services
? Economists differentiate between two types of national income.
Nominal national income: The production of goods and services
valued at current prices.
Real national income: The production of goods and services
valued at constant prices.
There are four ways to measure the national income:
? Income method / approach
? Expenditure method/ approach
? Output method/ approach
? Value added method / approach
1. Income Approach (Method):
? Under this method, we add all the incomes from employment and
ownership of assets before taxation received from all the production
activities in an economy.
? In this method, GDP is measured as the total income from all economic activities.
(Income from employment and income from profit, income from land, income from
GDP = Rent + Wages + Interest + Profit
If Rent=300, Wages=900, Interest=200, Profit=77, find GDP=?
GNP (GDP) = W + R + P + T
Example: Compute the GDP if wages are 25000, the rate of interest on capital is
24000, the total rent of the land is 24000 and profits are 18000 R.O.
GDP = W + P + R + T
GDP = ?
? 2. Expenditure Approach:
? In this method, GDP is measured, by adding all types of spending on final goods and
services. (Personal consumption + Investment + Government expenditure + Trade
? GDP = C + I + G + (X – M)
C=1500, I=200, G=2500, X=800, M=1000, Find GDP.
According to this approach GNP is the total of all expenditure on final goods and
services produced in a given period of time.
? The total expenditure is classified into four:
? Consumption expenditure (C)
? Investment expenditure ( I )
? Government expenditure ( G ).
? Net export (X-M)
? Accordingly:
? Ex.
Compute GNP by expenditure approach if:
Consumption expenditure is –
Government expenditure
Value of exports
Value of imports
GNP = C + I + G + (X – M)
? 3. Output Approach:
? In this method, GDP is measured as the total value of all final goods and services
produced by all sectors in one year.
? (Agricultural sector output + industrial sector output + service sector output)
? IF AGRI=700, INDUST=800, SERV=900, GDP=?
? Value Added Method / Approach:
? In this method, the value of final goods and services are not added.
? We count the value added at every stage of production. And then sum up the total value of output
? GDP ADDED VALUE:= X1+( X2 –X1)+ +( X3 –X2)+………(Xn-xn-1) .
? Here we classify the economic activity into sectors, then we calculate the value added of each
sector alone, which is (the value of product – the cost of production or the cost of intermediate
good). And then you add all value added to get GNP.
Stage of
Value of
Cost of
Value added
? What GDP is not measure:
? Non-Market Activity (home production, leisure, black market activity)
? Environmental Quality/Natural Resource Depletion
? Life Expectancy and Health
? Income Distribution
? Crime/Safety
? References:
? N. Gregory Mankiew-“Principles of Macroeconomics” Peg-199-206.
? En. Amir B. Jusoh (Lecturer)
? G S Gupta –“macroeconomic theory and application” peg-16-28.
? Introductory economics (micro and macro) [electronic resource] : A
textbook by-Subhendu
Dutta. Dutta, Subhendu. Part B Peg No 91-159
? Macroeconomics: Theory and Policy by D. N. Dwivedi Tata McGraw-Hill
Education, 2005
??:?? – juc
5 Jul
5 Jul
203 – Part
1. Discuss the concept of macroeconomic. And discuss
how to achieve macroeconomic goals. (06 Marks)
2. Describe in detail how the reciprocal circulation of
income between producers and consumers. (04
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