Your SlideShare is downloading. ×
0
(J) the circular flow model
(J) the circular flow model
(J) the circular flow model
(J) the circular flow model
(J) the circular flow model
(J) the circular flow model
(J) the circular flow model
(J) the circular flow model
(J) the circular flow model
(J) the circular flow model
(J) the circular flow model
(J) the circular flow model
(J) the circular flow model
(J) the circular flow model
(J) the circular flow model
(J) the circular flow model
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

(J) the circular flow model

10,268

Published on

Published in: Education
0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
10,268
On Slideshare
0
From Embeds
0
Number of Embeds
4
Actions
Shares
0
Downloads
198
Comments
0
Likes
1
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. The Circular Flow of Economic Activity
  • 2. Review of Microeconomic Activities:
    Markets for factors (inputs) of production
    Markets for goods and services
    Buyers
    Markets for goods and services
    Markets for factors (inputs) of production
    Sellers
  • 3. Review of Microeconomic Activities:
    Optimal satisfaction
    AsBuyers
    Minimal Cost
    Maximum Income
    Profit Maximization
    AsSellers
  • 4. Review of Microeconomic Activities:
    Consumer Surplus
    Producer Surplus
    Surplus
  • 5. From Microeconomic Analysis to Macroeconomic Analysis:
    First, analysis of markets (microeconomics)
    Next, analysis of economic sectors (macroeconomics):
    2-Sector Circular Flow (basic sectors directly connected to the markets; basic economy)
    5-Sector Circular Flow (3 additional sectors to complete the economy)
  • 6. The Basic (2-Sector) Circular Flow Model
    a simple economic model which describes the reciprocal circulation of income between producers and consumers.
    In the circular flow model, the inter-dependent entities of producer and consumer are referred to as "firms" and "households" respectively and provide each other with factors in order to facilitate the flow of income.
    Firms provide consumers with goods and services in exchange for consumer expenditure and "factors of production" from households.
  • 7. MARKETS
    FOR
    GOODS AND SERVICES
    • Firms sell
    Goods and
    Goods
    • Households buy
    services
    and services
    bought
    sold
    HOUSEHOLDS
    FIRMS
    • Buy and consume
    • 8. Produce and sell
    goods and services
    goods and services
    • Own and sell factors
    • 9. Hire and use factors
    of production
    of production
    MARKETS
    Labor, land,
    Factors of
    FOR
    and capital
    production
    FACTORS OF PRODUCTION
    • Households sell
    Wages, rent,
    • Firms buy
    and profit
    The Basic 2-Sector Circular Flow Model (w/ details)
    Spending
    Revenue
    Income
    = Flow of inputs
    and outputs
    = Flow of money
    Copyright © 2004 South-Western
  • 10. The Basic (2-Sector Circular Flow Model
  • 11. The Basic (2-Sector Circular Flow Model
    Assumptions: (ideal situation)
    The economy consists of two sectors: households and firms.
    Households spend all of their income (Y) on goods and services or consumption (C). There is no saving (S).
    All output (O) produced by firms is purchased by households through their expenditure (E).
    There is no financial sector.
    There is no government sector.
    There is no international sector.
  • 12. The Basic Circular Flow Model
    The Simple Maths:
    Y = E
    E = C
    C = O
    /.: Income Perspective: Y = C
  • 13. The 5-Sector Model
    A more realistic representation of the economy.
    Unlike the two sector model where there are six assumptions the five sector circular flow relaxes all six assumptions.
    Since the first assumption is relaxed there are three more sectors introduced.
  • 14. The 5-Sector Model
    The Three Additional Sectors:
    The Financial Sector
    The Government Sector
    The International (or Overseas) Sector
  • 15. The 5-Sector Model
    Income (Y)
    Resources
    HOUSEHOLDS
    FIRMS
    Output (O)
    Consumption/Expenditures (E)
    INJECTIONS
    L E A K A G E S
    Savings (S)
    Investments (I)
    FINANCIAL SECTOR
    Government Spending (G)
    Taxation (T)
    GOVERNMENT SECTOR
    Imports (M)
    Exports (X)
    INTERNATIONAL SECTOR
  • 16. The 5-Sector Model
    LEAKAGES
    Savings (S)
    Taxes (T)
    Imports (M)
    INJECTIONS
    FINANCIAL SECTOR
    Investments (I)
    Government
    Spending (G)
    Exports (X)
    GOVERNMENT SECTOR
    INTERNATIONAL SECTOR
  • 17. The Basic Circular Flow Model
    The Simple Maths:
    Since Y = C + S + T + M
    Y= C + I + G + X
    Then, S + T + M = I + G + X
    (Leakages) (Injections)
  • 18. The Basic Circular Flow Model
    If:
    S + T + M = I + G + X
    S + T + M > I + G + X
    S + T + M < I + G + X
    Then, we have a:
    More or less Stable Economy.
    Contracting or Shrinking Economy.
    Growing economy.

×