To be discussed:

Learning Outcome Five

I. Circular Flow – model of real output, income and spending assumes that the price level is constant. a. Simple and multi-sector circular flow model i. Money – Currency that facilitates the exchange of goods and services, and acts as a store and measure of value. ii. Income – The flow of earnings over a period of time iii. Wages (and salaries) – to the members of the household iv. Profits ( as Dividends) – to the members of the household for owning a share v. Rents (including royalties. – Paid to household that have supplied natural or intellectual property resources. b. Discussion of process flow vi. Money flows from the households to firms as consumers purchase goods and services. vii. Money flows from the firms to households as businesses pay wages and salaries to their workers, dividends to their owners and interest to their creditors. viii. Households spend some of their income and save the remainder ix. Firms sell goods to households, to government, to other firms and, as exports, to overseas purchasers. x. Domestic firms (especially retailers and wholesalers) purchase both domestically produced goods and foreign-made goods (imports) xi. The government takes money out of the income flow in the form of income taxes, and puts money back into the circular flow by spending money on collective goods (including roads, hospitals and police services) and through paying transfers, such as social security benefits. xii. Firms invest by purchasing capital goods and inventories from other firms or as imports. xiii. All of the national income is either spent in consumption goods, is saved, or is paid to government as income tax xiv. Saving and investment are linked, in practice, through the