Circular flow
description
Transcript of Circular flow
WHAT IS AN ECONOMY?
• How to describe something as complex as an economy
• As a Metaphor ? Eg,
a bowl of spaghetti ?
(Why?)
each strand represents
an economic transaction
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
1. 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 sector
2. Business Sector – where all production occurs and sells goods and services
CIRCULAR FLOW OF INCOME2 Sector Model
3 Sector Model
3. Finance Sector – where people SAVE and BORROW money, eg, banks, building societies, credit unions, superannuation companies, sharemarket, etc.
(Business borrowing is known as INVESTMENT)
4 Sector Model
4. Government Sector – (Federal, state and local) where the Government TAXES people (and businesses) and SPENDS money (eg subsidies to businesses, welfare payments to households)
5 Sector Model
5. Overseas Sector – There are many flows of money in and out of Australia. The most well known flows are payments overseas (IMPORTS) and payments to Australians (EXPORTS) for goods.
5 Sector Model
Household Business
Finance
Savings Investment
Govt.
Govt SpendingTax
Overseas
ExportsImports
Equilibrium: Leakages and Injections
Leakages (Red Lines) are money that leaves the circular flow eg.– Savings– Tax– Imports
Injections (Green Lines) are money that enters the economy eg.– Investment– Govt. spending– Exports
5 Sector Model
Household Business
Finance
Savings Investment
Govt.
Govt SpendingTax
Overseas
ExportsImports
Leakages Injections