As a model• Economists thankfully have developed a simple model ( to represent the major areas of activity and flows of money between them) known as “The Circular Flow of Income”• FEATURES:• 5 major areas (or “Sectors” of activity)• Income/money flows between these sectors
CIRCULAR FLOW OF INCOME 2 Sector Model1. Household Sector comprises total population - who are consumers - and producers (owners of resources) - Households receive income for providing resources ( land, labour, capital,enterprise) to the business sector2. Business Sector – where all production occurs and sells goods and services
2 Sector Model Income (Y)Household Business Consumption
3 Sector Model3. Finance Sector – where people SAVE and BORROW money, eg, banks, building societies, credit unions, superannuation companies, sharemarket, etc. (Business borrowing is known as INVESTMENT)
3 Sector ModelHousehold Business Finance Savings Investment
4 Sector Model4. Government Sector – (Federal, state and local) where the Government TAXES people (and businesses) and SPENDS money (eg subsidies to businesses, welfare payments to households)
Equilibrium: Leakages and InjectionsLeakages (Red Lines) are money that leaves the circular flow eg. – Savings – Tax – ImportsInjections (Green Lines) are money that enters the economy eg. – Investment – Govt. spending – Exports
5 Sector Model Household Business Finance Savings InvestmentLeakages Injections Govt. Tax Govt Spending Overseas Imports Exports
Equilibrium: Leakages and InjectionsIf leakages are higher than injections Total Income (Y) will fallIf injections are higher than leakages Total Income (Y) will rise If leakages = injections Total Income (Y) will not change ie The Economy is in “EQUILIBRIUM”
A particular slide catching your eye?
Clipping is a handy way to collect important slides you want to go back to later.