1.the Dynamics of the Economy

7/31/2019 1.the Dynamics of the Economy

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The Dynamics of the Economy

Definition

Macroeconomics looksat the economy as a whole andhow the parts of the economyinteract in order to generatewealth.


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Component Parts of the

Economy (1)Firms supply goods and services and

provide employment.

Households buy goods and servicesand supply their labour to the firmswhich make them

Government

supplies and demandsgoods and services. May also try toactively manage the economy.


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Component Parts of the

Economy (2)Banks collect money, for examplesavings, and re-distribute it tothose who need it, for exampleinvestment

External (overseas) sector

anywhere outside of the countrythat goods are sold to (exports) orbought from (imports)


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ExerciseDraw a diagram which shows therelationships between the fivecomponents parts of the economy.


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Firms Households

Government

Banks

Overseas


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Macroeconomic ObjectivesThere are 4 main macroeconomicobjectives:

Economic growth

Inflation

UnemploymentThe Balance of Payments


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Economic GrowthDefinition increases in a countrys

productive potential over time which is

measured in terms of Gross DomesticProduct (G.D.P.) per capita

Higher rates of economic growth arepreferred providing that they aresustainable


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Factors Which Determine

Economic Growth RatesThe rate of investment in capital,including new technology

The quantity and quality of labour

The ability to achieve higherproductivity through changes inworking practices


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InflationDefinition the rate of increase inprices in the economy as a whole,

measured as a percentage changein comparison to the previous year.

High rates of inflation are believedto be damaging to the economyand so should be avoided.


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Sources of InflationDemand-pull the demand for goods

and services is greater than the

available supply which results in risingprices

Cost-push a result of increases in

firms

costs, for example higher rawmaterials prices or wage rises, whichare then passed on to the consumer inthe form of higher prices


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UnemploymentDefinition the percentage of thelabour force who want to work butdo not currently have a job

A high rate of unemployment isdamaging to the economy as it

represents a waste of resourceswhich could otherwise be used togenerate economic growth


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Types of UnemploymentFrictional people moving between jobs

Structural people do not have the right

skills for the jobs availableDemand deficient occurs when thelevel of demand for goods and servicesis not high enough, for example in a

recessionClassical wages are too high so thatsupply exceeds the demand for labour


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Balance of PaymentsDefinition summary of a countrys

trade in goods and services (current

account) and financing arrangements(capital account) with other countries

A large deficit on the current account is

undesirable as imports are greater thanexports so that money flows out of thecountry. The value of the countryscurrency the exchange rate will fall.


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ExerciseWhat impact will each of thefollowing have on the

macroeconomic objectives?A) more people undertaking highereducation programmes

B) a significant rise in the price ofoil

C) a recession in the economy

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1.the Dynamics of the Economy