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Definitions & Characteristics

Goods sector

The goods sector involves trading of goods and services between the households, the firms, the government and the foreign sectors. The denomination in this sector is in real terms, meaning that only the consumption value of the goods, not its monetary price, is used for calculations. The concepts in the goods sector include Keynesian multiplier and expenditure.

Money Market

The money market deals with how the money demand and money supply balanced out at an equilibrium interest rate.

IS-LM curve

The IS-LM curve combines the insights from the goods market and the money market. The goods market is represented by the IS curve, while the money market is represented by the LM curve.

Supply side

So far the three sections above (goods, money, IS-LM) deal with the demand of goods, services and money. The supply side deals with production from factories, etc.

AS-AD curves

The AS-AD curve is a combination of the demand and the supply of an economy. The AS curve represents the supply, while the AD curve represents the demand.

Foreign sectors

When foreign sectors are added to the macroeconomics model trade between countries is allowed. The economy under study is called an open economy (as opposed to closed economy). The foreign sectors affect all of the markets above through price, interest rate and exchange rate.


The productivity is the amount of goods and services that can be produced by a worker in a hour. The determinants of productivity are: physical capital per worker,human capital per worker, natural resources per worker, and technological knowledge. An increasing productivity denotes a higher standard of living because people in the economy is able to consume more with this increase in production of goods and services.