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Circular
describes the reciprocal circulation of income between producers and consumers fundamental representation of macroeconomic activity among the major players in the economy--consumers, producers, government, and the rest of the world. Different versions of the model sequentially combined the four sectors--household, business, government, and foreign--and the three markets--product, resource, and financial--into increasingly more comprehensive representations of the economy.
Production The use of economic resources in the creation of goods and services for the satisfaction of human wants. Consumption The using up of goods and services by consumer purchasing or in the production of other goods. Employment The use of economic resources in production; engagement in activity Income Generation The production of maximum amount an individual can spend during a period without being any worse off.
This includes everyone, all people, seeking to satisfy unlimited wants and needs. This sector is responsible for consumption and undertakes consumption expenditures. It also owns all productive resources.
Firm
The basic producing unit. This includes the institutions (especially proprietorships, partnerships, and corporations-BUSINESS ORGANIZATIONS)
that
undertake the task of combining resources to produce goods and services. This sector does the production. It also buys capital goods with investment expenditures.
purchase what they use to produce goods and services. Resources are in the form of labor, natural resources, capital, and entrepreneurship, all of which are supplied by households.
Product
markets are where goods and services are sold. Other Sectors involved in the circular flow Government sector: This includes the ruling bodies of the federal,
state, and local governments. Regulation is the prime function of the government sector, especially passing laws, collecting taxes, and forcing the other sectors to do what they would not do voluntarily. It buys a portion of domestic product',500,400)">gross domestic product as government purchases.
Foreign sector: This includes everyone and everything (households, businesses, and governments) beyond the boundaries of the domestic economy. It buys exports produced by the domestic economy and produces imports purchased by the domestic economy, which are commonly combined into net exports (exports minus imports).
Flow
A quantity measured over a particular period of time. Stock A quantity measured as of a given point in time. The concepts of stock and flow measurements are essential in understanding the economic variables of wealth and income.
Wealth Anything of valued owned. It is a stock since it is what is owned at a particular time. Income The rate at which we earn money. It is a flow since income that is saved, increases the stock of wealth.
Outflows (factors that decrease the level of economic activity) Savings Taxes Imports Inflows (factors that increase the level of economic activity) Investment Government Spending Exports
Outflows are difficult to control because they are dependent on income. When income increases, we expect savings, taxes, and imports to increase.
Inflows are easier to manipulate. The proper use of policy enables the government to encourage exports and investments and to increase its expenditures when it desires to expand the flow of economic activity.
Savings-is
setting aside a portion of a persons income for future use Inventory-normal quantity of goods stored by the business firms for future use(stocks)
Investment-The
sacrifice of current benefits or rewards to pursue an activity with expectations of greater future benefits or rewards. Investment is typically used to mean the purchase of capital by business in anticipation of the profit.
Taxes-Any
sort of forced or coerced payments to government. The primary reason government collects taxes is to get the revenue needed to finance public goods and pay administrative expenses.
Monetary policy
Affects the savings and investment.
Fiscal policy
Controls taxes and government expenditures.
Trade policy
Affects a countrys exports and imports.
Four
Models
A third version
of the model includes the government sector. This model highlights the importance of taxes, which are also diverted from household sector income and used to finance government purchases.
The complete circular flow model, with all four macroeconomic sectors (household,
business, government and foreign) and all three macroeconomic markets (product, resource, and financial), is presented in the above exhibit.
HOUSEHOLDS
PRODUCING UNITS
Household Sector
Business Sector
INTERMEDIATE
GOOD FIRM
CONSUMERS
INTERMEDIATE
HOUSEHOLDS
RESOURCES
INTERMEDIATE GOOD
FIRM
RESOURCES
HOUSEHOLDS
INTERMEDIATE GOOD
FIRM
HOUSEHOLDS
RESOURCES
INTERMEDIATE GOOD
FIRM
RESOURCES
FINAL GOODS
The Circular Flow of Goods & Income of Households & Firms with the Government & Foreign Countries
GOVERNMENT
Wages, Transfer Payments
Purchase of Goods & Services
Taxes
Income Payments of Wages, Rent, Dividends, & Interests Goods & Services
Money Payments for Imports Money Payments for Exports
FOREIGN COUNTRIES
HOUSEHOLDS
PRODUCING UNITS
EXPORTS EXPENDITURES
INVESTMENTS
TAXES
Government
SAVINGS
Banks
The goods, resources, and money payments will flow as long as households continue to consume, and as long as firms continue to produce. That since goods and resources flow in exchange for payments, the rate of payments flow will in the end be the same. Money is the inducing factor, and the pillar of the price system. Without it, there is no price system.
2.
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GOOD DAY!!!