Macroeconomics/Macroeconomic Equilibrium

Macroeconomic Equilibrium

Equilibrium is the situation where there is no tendency for change. The economy can be in equilibrium at any level of economic activity that is a high level (boom) or a low level (recession). Due to the size of many modern economies, equilibrium is a very temporary state, as changing variables affect the economy.

Macroeconomic Equilibrium can be shown through the C.F.M. using:

S + T + M = I + G + X

Savings + taxation + imports = investment + government spending + exports

This can be understood as savings approximately equal to investment, government spending to taxation, and similarly imports to exports, at least over the long run. It means that, at equilibrium, injections into the income stream equal the leakages from the income stream.

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∑E = ∑O = ∑Y

Total expenditure = total output = total income

It is easier to remember if you just think that they are really different ways of measuring the same thing, which is the flow of factors through the economy, which can be demonstrated with the CFM.

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Leakages = Injections

A change in the leakages and injections will cause a new equilibrium to be established where total income (∑Y), total output (∑O), and total expenditures (∑E) will again equate but at either a higher or lower level than the original equilibrium.

Leakages do not have to equal injections

e.g. imports constitute a leakage from the importing country's economy, but an injection to the exporting countries economy.

So looking at the world economy it is zero sum game, where Leakages = Injections, but looking at any one country's economy this need not be the case.