Macroeconomics

Table of Contents

1. Topic pack - Macroeconomics - introduction
2. 2.1 The level of overall economic activity (notes)
   1. Overall economic activity - introduction
   2. The circular flow of income model (1)
   3. Circular flow - two sector closed
   4. Circular flow - two sector open
   5. Circular flow - three sector open
   6. Circular flow - government
   7. The circular flow of income model (2)
   8. Circular flow - a summary
   9. Some mathematics
   10. Measures of economic activity
   11. Examining the three methods of calculating national income
   12. What is GDP? (video)
   13. Different national income measures
   14. Real v money data
   15. Current and constant prices
   16. Using index numbers
   17. Total and per capita
   18. Case study - rapid economic growth
   19. Using national income data
   20. Purchasing power of GDP
   21. Alternative measures of GDP
   22. Case Study
   23. Short term fluctuations and long term trends
   24. The business cycle in history
3. 2.1 The level of overall economic activity (questions)
4. Section 2.2 Aggregate demand and supply (notes)
5. Section 2.2 Aggregate demand and supply (simulations and activities)
6. 2.2 Aggregate Demand and Aggregate Supply (questions)
7. 2.3 Macroeconomic objectives (notes)
8. Low Unemployment
9. 2.3 Macroeconomic objectives (questions)
10. 2.4 Fiscal policy (notes)
11. 2.4 Fiscal policy (questions)
12. 2.5 Monetary policy (notes)
13. 2.5 Monetary Policy (questions)
14. Section 2.6 Supply-side policies (notes)
15. 2.6 Supply-side policies (questions)
16. Print View

Simple Mathematical Economics

You can refer to Page 60 to see how the folowing marginal concepts are used in analysis.

Economists often use mathematics to clarify the analysis of the circular flow of income model.

Income is passed on in the circular flow of income through consumer spending or leaked out though savings, taxation or spending on imports.

The proportion of national income (Y) spent on consumption (C) is called the average propensity to consume (APC). It is the amount used for consumption out of each unit of income (1 Real, GBP or $US for example) 

The proportion of national income saved is called the average propensity to save (APS)

(NB APC + APS = 1) in words: all income is either spent or saved (where saved means not spent)

Economists are most concerned with what happens at the margin, or when variables change in an incremental way (each additional unit of a given variable).

Anytime there is an incremental change in national income, consumption, savings, taxation and imports will also change by a certain proportion. Whereas average propensity is concerned with the proportion of total national income that is passed on or leaked from the circular flow of income, marginal propensity is used to describe the proportion of an incremental (additional or extra) change in income that is either spent or leaked from the circular flow of income, .

We can, therefore, identify the marginal propensity to consume as the proportion of a change in national income that is spent on consumption

Similarly, the proportion of a change in national income that is saved, is called the marginal propensity to save (MPS)

The proportion of a change in national income that is paid to the government in tax, is called the marginal rate of taxation (MRT)

The proportion of a change in national income that is spent on imported goods, is called the marginal propensity to import (MPM)

These concepts will be revisited later in later section when we look at what causes national income to change.