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Circular Flow and Intro to Macroeconomics
 

Circular Flow and Intro to Macroeconomics

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    Circular Flow and Intro to Macroeconomics Circular Flow and Intro to Macroeconomics Presentation Transcript

    • Macroeconomics
      Week 4
    • CIRCULAR FLOW DIAGRAM
      is a visual model of the economy that shows how money flows through markets among households and firms.
    • PRODUCTION,
      RESOURCES, &
      INCOME
      FACTORS OF PRODUCTION
      • Land (rent)
      • Labor (labor)
      • Capital (interest) ; and
      • Entrepreneurship (profit)
    • 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.
    • 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.
    • 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.
    • 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
      • In reality, there are OUTFLOWS (Leakages) from and INFLOWS (INJECTIONS) into the circular flow.
      INJECTIONS AND LEAKAGES
      • It is a fact that not all income and expenditures circulate continuously.
      The Circular Flow of Economic Activity
    • 9 of 46
      5-SECTOR CIRCULAR FLOW
      EXPORTS (X)
      GOVERNMENT SPENDING (G)
      INVESTMENT
      (I)
      BANKS
      GOVERNMENT
      REST OF THE WORLD
      SAVINGS
      (S)
      TAXES
      (T)
      IMPORTS
      (M)
      INFLOWS: Investment (I), Government Spending (G), and Exports (X)
      S + T + M
      =
      I + G + X or
      OUTFLOWS
      =
      INFLOWS
      OUTFLOWS: Savings (S), Taxes (T), and Imports (M)