Intro to Macroeconomic Markets

1
Intro to Macroeconomic Markets

• By Professor Jermaine Whirl
• Information to use by students of East Georgia
  College

2
Circular Flow of Income Diagram

• Households- Provide Labor to firms.
• Firms provide wages Salaries to Households.
• Households spend money on goods and services
  provided by firms.

3
Resource Markets

• Households pay taxes, provide savings to banks,
  provide labor, and purchase goods and services.
• Government purchases goods and services, collect
  taxes, enter into contracts
• Businesses purchase labor (provides wages),
  provides goods and services, enter into contracts
  with the government, and invest money with
  financial institutions.
• Financial Firms- Provided investment
  opportunities for firms government, provide
  savings opportunity for households.

4
Macroeconomics of Saving Investment

• In a closed economy national savings funds
  investment spending.
• This is because the national government can only
  borrow from internal banks.
• The US national savings rate has been falling for
  years.
• If we were a closed economy this would have
  drastic effects on the domestic interest rates.

5
Savings and Investment Continued

• Private Savings YTR-C-T
• YGDP, TRTransfer Payments, C-Consumption,
  T-Taxes
• Public Savings T-G-TR
• Therefore, Private Public Savings
• SY-C-G
• Or
• SI SavingsInvestment

6
Market for Loanable Funds

• The interaction of borrowers and lenders that
  determines the market interest rate and the
  quantity of loanable funds exchanged.

7
Effects of a closed economy Crowding out Effect
Crowding Out A decline in private expenditures
as a result of an increase in government
purchases.
8
FOREIGN EXCHANGE MARKET

• International transactions for foreign a) goods
  and b) financial assets creates a demand for
  foreign currency to buy those foreign goods and
  assets.  When Americans buy foreign products or
  invest in foreign countries, that creates a
  demand for foreign currency.  When foreigners buy
  American products or invest in U.S., that creates
  a demand for U.S. dollars and creates a supply of
  foreign currency.  Based on the interactions of
  Supply and Demand in the foreign exchange market,
  the dollar will either appreciate (strengthen) or
  depreciate (weaken).  When the dollar
  appreciates, the foreign currency depreciates.  

9
Foreign Exchange Market Dynamics

• If the demand for U.S. products (exports)
  increases, that will appreciate the and
  depreciate the foreign currency.  If the demand
  for foreign products (imports) increases, that
  will appreciate the foreign currency and
  depreciate the .  The ex-rate will adjust to
  bring about equilibrium in the Foreign Exchange
  Market.

10
Strong Dollar Weak Foreign Currency

• Advantages
• Foreign Goods and Services are Cheap
• Helps the Import Sector of the Economy
• Helps US companies buy foreign Inputs
• Helps the US Consumer- Imports are Cheaper
• US Travel is Cheaper

• Disadvantages
• US Exports are expensive
• Tourism suffers
• Hurts the Export Sector
• Domestic Goods are less competitive overseas

11
Weak DollarStrong Foreign Currency

• Advantage
• Helps the US Export Sector.
• US goods and services are cheaper overseas
• Tourism increases
• Domestic goods are more competitive

• Disadvantage
• Hurts the import sector of the economy
• Especially those buying foreign inputs.
• Hurts US consumers
• US Foreign Travel hurts