What is 'macroeconomics'?
You may have already studied microeconomics, which
looks at supply, demand and prices for individual
goods. Macroeconomics looks at the bigger picture
and involves the study of the economy as a whole.
National income
Let us start by looking at a simple example - a
'two sector' economy made up of households
(consumers) and firms (producers) -and use this to
develop the idea of national income. To start with
we will ignore the impact of government policy and
overseas sectors.
Households ultimately own the factors of
production, e.g., labour, materials and capital,
and supply these factors to firms who use them to
produce goods and services. In return households
earn rewards for supplying the firms with the
factors of production e.g., wages and interest on
capital. These rewards are in turn used to buy the
goods that the firms have produced. This process
is known as a circular flow- see Figure 1.
Figure 1: Simple circular flow
From......
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