Economics (Macro)

Economics (Macro)

1. AGGREGATE DEMAND (AD): Total spending on goods and services by consumers, firms, government at home and both people and firms abroad.

   • AD: C + I + G+ (X-M)
     • Consumer Expenditure (C) : Largest single component of AD
       • Factors which influence the size of the total spending by households.
         • Level of DISPOSABLE INCOME
           • DISPOSABLE INCOME: The income that households have to devote to consumption and saving, taking into account payments of direct taxes and transfer payments.
         • Level of Average Propensity to Consume (APC)
           • AVERAGE PROPENSITY TO CONSUME (APC): The proportion of income that households devote to consumer expenditure.
         • Level of Marginal Propensity to Consume (MPC)
           • MARGINAL PROPENSITY TO CONSUME (MPC): The proportion of additional income devoted to consumer expenditure.
         • Level of Marginal Propensity to Save (MPS)
           • MARGINAL PROPENSITY TO SAVE (MPS): The proportion of additional income that is saved by households.
         • Level of Wealth
           • WEALTH is not the same as INCOME
             • INCOME: occurs during a period of time as a reward for the supply of factor services (e.g. labour)
             • WEALTH: stock of accumulated past savings ( it is represented by the asset holdings of the households)
         • Interest Rate
           • If part of a household's spending is financed by borrowing.
         • Level of future inflation
           • Consumer Pessimism
       • The Consumption Function: The relationship between consumer expenditure and disposable income; its position depends upon the other factors that affect how much households spend on consumer expenditure.
     • Investment by Firms
       • INVESTMENT: expenditure undertaken by firms to add to the capital stock
       • Factors that influence the size of Investment
         • Interest Rate (Cost of borrowing)
         • Level of Retained Profit
     • Government Spending (Expenditure)
       • Autonomous, meaning independent from the common variables within the model.
     • Exports and Imports
       • Factors that influence the level of Exports and Imports
         • Exchange Rate
           • SPICED: Strong Pound Imports Cheap Exports Dear
         • Level of Inflation
         • Level of Domestic Aggregate Income
         • Level of Incomes in the rest of the world ( demand for UK goods/services)

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