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Circular Flow - Macro Economics

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Macro Economics

Module 1: Circular Flow
Circular flow of economic activities and Income
Circular flow of income is the representation of the relations between households and firms. Factors of production (for example labour) are owned by households, who supply those factors to the firms. In return they receive rewards such as rent, wage, interest and profit.
On the other hand firms supply good and services to households for which they receive payments. * Another sector in in the circular flow of income is the Government. The Government pays for goods and services to firms and transfers payments to households. The savings go to financial institutions. It receives three kinds of taxes:
Indirect taxes from firms
Corporate taxes from firms
And personal taxes from households. * * (tax is a leakage but also part of profit) * * The foreign sector is also a part of circular flow, which contains in its turn households, * government and firms. They export goods and services to other countries, while other * goods and services are imported to them. * * Income = expenditure= output in a circular flow, which means that when people spend * money, it creates a continuous flow that allows firms to produce even more goods and * services which make people spend again. *
Theory of aggregation
Macroeconomics is the sum of microeconomics, that is to say: it’s not the individual’s well-being that is most important, but the well-being of the whole society.
Stock and flow
A stock is a quantity existing at a certain point in time. The quantity of the stock can change through inflows and outflows.
Intermediate and final goods
Intermediate goods (producer goods) are goods that aren’t finished yet, they can be used in the production of final goods.
An example of an intermediate good is steel, they use it to produce many other goods.
Final goods are goods that are ready to be consumed, (also referred to as consumer goods) an example of this is a vacuum cleaner.
Capital formation
The formation of capital is possible because of the creation of surplus during a flow.
The creation of employment is possible when there is more flow, because that means that there is more income, which also means that expenditure and output increases, which leads to employment creation.
Open and Closed economy
There are two kinds of economy: You have an open economy and a closed economy.
The closed economy only entails the household, government and firms of one country, which means it is self-sufficient. While the open economy includes foreign sectors (which means export and import).

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