Economic ppt

PART 7
THE CIRCULAR FLOW AND
ECONOMIC FLUCTUATIONS
Chapter 15
The Circular Flow
Copyright ã 2005 McGraw-Hill Australia Pty Ltd
PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 15-1

Lecture Plan
• The exchange flow between households and the
business sector
– The two-sector economy
• The exchange flows with financial markets
– The financial sector and the three-sector economy
• The exchange flows between households,
businesses and government
– The government sector and the four-sector economy
• Exchange flows with other countries
– The overseas sector and the five-sector (open) economy

The Circular Flow of Goods and
Money
• In a capitalistic/mixed economy money is used to
– Buy and sell goods and resources in markets
– Pay and collect taxes
– Borrow and lend in financial markets
• The ABS structures the Australian national
accounts around the five sectors of the economy
i.e.
– Businesses, households
– Financial, government, overseas sectors

The Two-sector Model of the
Economy (Households and Firms)
• The households (consumers):
– Require goods and services to satisfy their
personal wants
– Own all resources (i.e. labour, capital, land, enterprise)
– Sell resources to businesses
– Gain income (e.g. wage, interest, rent, profit) from such
sales
• The firms/business sector (producers):
– Uses resources provided by households to produce goods
and services
– Sells those goods and services for income

Economy
• Assumptions:
– Businesses are the only producers
– All goods and services are sold to consumers
– Consumers spend ALL their income on goods and
services
– There are no resource inventories
• Therefore:
• Total demand (expenditure) = total supply (output)
• The economy will always be in equilibrium
(cont.)

Economy (cont.)
• Two groups of decision makers
– Households (sell their resources)
– Firms (sell goods and services)
• Interaction between the two sectors through
markets:
– Resource (factor) markets
– Product markets
(cont.)

Economy (cont.)
Productive resources
Factor market
Income
Firms sector
Goods and Services
Household
sector
Expenditure
Product market

In the Basic Circular Flow
O = Y = E
Where:
O = output (production)
Y = income
E = expenditure (demand)

The Financial Sector
• Saving (S) = Part of the Income that is not spent
(leakage)
• Total income = consumption spending + saving, i.e.
Y = C + S
• Investment (I) = that part of production that is not
used for current consumption, e.g. capital goods
Total income (Y) = C + I
• Investment is an injection. If:
S > I, the economy contracts
S < I, the economy expands
S = I, the economy is in equilibrium
• The financial sector acts as an intermediary
between lenders and borrowers

The Government Sector
• Government taxation (T) reduces households’
disposable income and business funds
Taxation (T) is a leakage (outflow)
• Government spending (G) includes expenditure on
collective goods and services and goods and
services provided by the business sector, plus
transfer payments (social security payments)

The Modified Five-sector Model of the
Economy
It is a five-sector model of the economy:
• The household sector
• The firms sector
• The government sector
• The financial sector
• The external (overseas) sector

Economy (cont.)
Household
sector
Income
Financial
sector
Government
sector
External
sector
Firms
sector
Savings
Taxation
Imports
Investment
Government
expenditure
Exports
IIN
NJ
JE
E
CCT
TI
IO
O
NN
SS
LLE
E
AA
KK
AAG
GE
E
SS
Expenditure

The Open Economy
• Total leakages (outflows) are S, T and M
• Total injections are I, G and X
• The impact of total leakages/injections on the
economic activity is as follows:
S + T + M = I + G + X equilibrium
S + T + M > I + G + X contraction
S + T + M < I + G + X expansion

Economic ppt

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Economic ppt

Similar to Economic ppt (20)

Recently uploaded

Recently uploaded (20)

Economic ppt