What Is 'macroeconomics'?

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 Figure 1 we can see that there are three ways

of measuring the amount of economic activity in

the