circular flow and intro to macroeconomics
TRANSCRIPT
MacroeconomicsWeek 4
THE CIRCULAR FLOW
CIRCULAR FLOW DIAGRAMis a visual model of the economy that shows how money flows through markets among households and firms.
THE CIRCULAR FLOW
PRODUCTION,RESOURCES, &INCOMEFACTORS OF PRODUCTION Land (rent) Labor (labor) Capital (interest) ; and Entrepreneurship (profit)
THE CIRCULAR FLOW
INTEGRATING PRODUCTION &AND CONSUMPTION
Money creates income every time it changes hands in the market system. On the other hand, the amount of money available for use in the two-household economy is not equal to income.
Income is a FLOW concept as it is generated and measured for a period of time.
Wealth is a STOCK concept as it refers to all materials which possess economic value owned by the populace.
THE CIRCULAR FLOW
PRODUCTION UNITS &AND CONSUMPTION UNITS
Production is organized by FIRMS and not HOUSEHOLDS.
HOUSEHOLDS are resource owners (land, labor, capital, entrepreneurship)
FIRMS produce goods and services by utilizing the economic resources.
THE CIRCULAR FLOW
PRODUCTION UNITS & CONSUMPTION UNITS
In this model, funds flow from FIRMS to HOUSEHOLDS, producing MONEY INCOME (wages, rentals, interests, and profits) for the HOUSEHOLDS arising from the use of resources.
THE CIRCULAR FLOW
HOUSEHOLD AND INTERDEPENDENT PRODUCTION UNITS
Not all firms produce consumer goods and there are stages of production to undergo to produce a final product or output.
Concept of Value Added: For each stage in the production process adds to the value of the final product.
It is the production of final goods and services that is relevant in arriving at national income
The Circular Flow of Economic Activity
THE CIRCULAR FLOW
INJECTIONS AND LEAKAGES
It is a fact that not all income and expenditures circulate continuously.
In reality, there are OUTFLOWS (Leakages) from and INFLOWS (INJECTIONS) into the circular flow.
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BANKSBANKS
SAVINGS(S)
TAXES(T)
GOVERNMENTGOVERNMENT
IMPORTS(M)
REST OF THE WORLDREST OF THE WORLD
INVESTMENT (I)
GOVERNMENT SPENDING (G)
EXPORTS (X)
5-SECTOR CIRCULAR FLOW
OUTFLOWS: Savings (S), Taxes (T), and Imports (M)
INFLOWS: Investment (I), Government Spending (G), and Exports (X)S + T + M
= I + G + X or OUTFLOWS
= INFLOWS