UNIT 3

INTRODUCTION TO BASIC MACROECONOMIC MARKETS

FOUR KEY MARKETS :

RESOURCE/FACTOR MARKET: A highly aggregated market encompassing all resources

(labour, physical capital, land and entrepreneurship) that contribute to the production of current
output. The labour market forms the largest component of this market. Household Sells and
Firms Buy

GOODS & SERVICES/PRODUCT MARKET: The highly aggregated market encompassing

the flow of all final user goods and services. The market counts all items that enter into GDP.
Thus, real output in this market is equal to real GDP. Firms Sell and Households Buy.

LOANABLE FUNDS MARKET: A general term used to describe the market arrangements
that coordinate the borrowing and the lending decisions of business firms and households.
Commercial Banks, savings and loans associations, the stock and bond market and insurance
companies are important financial institutions in this market.

FOREIGN EXCHANGE MARKET: The market in which the currencies of different countries
are bought and sold.

CIRCULAR FLOW OF INCOME :

It is a simplified exposition of the way in which income flows around the economy in exchange
for goods and services between the various sectors that contribute to overall economic activity.
That is, it captures the flow of resources from household to firms and of products from firms to
households.
INJECTIONS:
Additions to the circular flow of income representing any expenditures on domestic goods and
services which originate from outside the household sector, comprising Investment expenditure,
government expenditure and export revenues.

LEAKAGES:
This refers to the part of the National Income that is not spent on households on the consumption
of domestically produced goods and services, comprising savings, taxes and expenditure on
imports, also referred to withdrawals.

FIGURE
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Important lesson

 Factors of production are the inputs into the production process. Land, labor, and capital
are the three key factors of production.

 circular flow implies that national income must equal national product

 Spending creates revenue, but production creates income. The difference between
domestic production and domestic spending has three pieces: imports (included in
spending, but not part of domestic production), exports (not included in spending, but
part of domestic production), and the net change in business inventories (goods produced
during a year but not sold during that year).

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