circular flow model : : lets simplify it
DESCRIPTION
Circular Flow Model : : Lets Simplify It. Private Sector Circular Flow. Private and Public Sectors. Private sector: households, businesses, & the international sector. Household spending “consumption”. Business spending on capital goods and inventories “investment”. - PowerPoint PPT PresentationTRANSCRIPT
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CircularCircular Flow FlowModelModel
::::
LetsLetsSimplifySimplify
ItIt
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Private Sector Circular FlowPrivate Sector Circular Flow
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Private and Public SectorsPrivate and Public SectorsPrivate sector:Private sector: households, households, businesses, & the international sector.businesses, & the international sector.
Household spending Household spending “consumption”.“consumption”.Business spending on Business spending on capital goods capital goods and inventoriesand inventories “investment”.“investment”. Sales of goods and services to Sales of goods and services to foreigners foreigners “exports.”“exports.”
Purchases from foreigners Purchases from foreigners “imports.”“imports.”Public sector:Public sector: government activities. government activities.
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Income Distribution in Market EconomyIncome Distribution in Market EconomyWhat you own What you own What you get What you get
Firms pay the Firms pay the factors of productionfactors of production according to their according to their marginal productsmarginal products– WorkersWorkers get get wageswages equal to the marginal equal to the marginal
product of product of laborlabor..– CapitalistsCapitalists get get interestinterest equal to the equal to the
marginal product of marginal product of capitalcapital..– LandlordsLandlords getget rentsrents equal to the marginal equal to the marginal
product of product of landland..– EntrepreneursEntrepreneurs get get profitsprofits equal to the equal to the
excess of revenues over costs (payments excess of revenues over costs (payments to other factors).to other factors).
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Household Household Spending Spending
and and IncomeIncome
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Private Sector Circular FlowY = Income earned from contributing to production = Wages + Interest + Rents + Profits = Receipts of FirmsY = Receipts = C + I + NX = Hshld Spending + Saving C + S = C + I + NX S = I + NX
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Direction of U.S. TradeDirection of U.S. Trade
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Open Open Economy Economy CircularCircular
Flow Flow
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The Government’s RoleThe Government’s Role
Imperfect Information Externalities Public Goods Lack of Competition Business Cycles
Correct for:
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Consumption by one person does not diminish the quantity or quality available to others.Public goods can be jointly consumedPublic goods are non-excludable
No one has a private property right to a public good.
• Everybody has incentive to be a free rider
• When everyone free rides, too little (or none) is produced.
Public GoodsPublic Goods
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Macroeconomic PolicyMacroeconomic PolicyMacro Stability: A Public GoodMacro Stability: A Public Good
Monetary PolicyMonetary Policy– Policies that influence Policies that influence money and creditmoney and credit
(money supply and interest rates). (money supply and interest rates). – In the U.S., the Federal Reserve Board In the U.S., the Federal Reserve Board
(“(“the Fedthe Fed”) is responsible for this.”) is responsible for this.Fiscal PolicyFiscal Policy– Policies that control government Policies that control government
spending and taxationspending and taxation. . – In the U.S. federal government, In the U.S. federal government,
CongressCongress enacts these policies and the enacts these policies and the PresidentPresident signs them into law. signs them into law.
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Federal, State, and Federal, State, and Local Government Local Government Expenditures for Expenditures for
Goods and Goods and ServicesServices
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U.S. U.S. Federal Federal Budget Budget DeficitsDeficits