Free Essay

Circular Flow - Macro Economics

In: Business and Management

Submitted By user1234
Words 424
Pages 2
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).

Similar Documents

Premium Essay


...Part B Question 1 Figure 1 The circular flow of income (Figure 1) shows connections between different sectors of our economic system. It revolves around flows of goods and services and factors of production between firms and households. Businesses produce goods and services and in the process of doing so, incomes are generated for factors of production such as wages and salaries going to people in work. Injections: The three injections -- investment, government purchases and export. These injection expenditures, like consumption, are used to purchase aggregate production through the product markets. Most importantly, injections add to the total volume of the basic circular flow. That is, they "inject" revenue into the product markets that is used for factor payments and becomes household income. Withdrawals are increases in savings, taxes or imports so reducing the circular flow of income and leading to a multiplied contraction of production (output). (1) Investment (I), Capital spending by firms - e.g. on new technology (2) Government (G), Government expenditure - e.g. on the NHS or defense (3) Export (X), e.g. Overseas consumers buying goods and service Leakages: The three leakages -- saving, taxes, and imports. These leakages, like consumption, are how the household sector divides up or uses its income. Most importantly, leakages subtract from the total volume of the basic circular flow. That is, they "leak" income away from the product markets,......

Words: 971 - Pages: 4

Premium Essay

The Importance of Economics and the Understanding of the

...Head: THE IMPORTANCE OF ECONOMICS AND THE The Importance of Economics and the Understanding of the Circular Flow Model and its Place in Society ******* *************** Abstract Economics as a whole is a tool for understanding and studying production, distribution, and consumption of goods and services. Economics is concerned with the resourcefulness of scares resources with an optimum contentment of economic wants. Human beings are not only impacted by economics, but they are also considered to be a scarce resource in the way of labor power. Because humans are both the moving force of Economics and a resource behind Economics, the impact to society that Economics has is inevitably strong. With economics we, as a people, function in a trade system that is self sustaining and self regulation with minimal government interference. The intent of this paper is to show how Economics impacts society through the cyclical system that is designed by nature to evolve with the changes in demands of the time. Introduction No matter where you are from or where you go, Economics is a factor that will impact you and your well being. Economics is from the Greek word οίκος [oikos], meaning 'family, household, estate', and the word νομος [nomos], meaning 'custom, law', hence "household management" and "management of the state". Economics is a social science that typically studies the production, distribution, and consumption of goods and services. Economics is a social......

Words: 1084 - Pages: 5

Premium Essay

Macro Economy Systems

...Macro Economy Systems Macroeconomics AIU Online Abstract In the following paper, I will be discussing the open and closed system of the two circular diagram presented in my textbook. I will explain what a closed system and open system is and provide examples for the both. Next, I will discuss the inner and outer flows of both systems. Then I will define the leakage and injections in an open system. Lastly, I will provide personal examples of the leakage and injection and describe and explain them both. Following the end of this paper, the reader should have a better understanding of and open and closed flows in the macro-economy. Macro Economy Systems It is very imperative that one understands the flows in the macro-economy. There are two flows: an open and a closed flow. In this paper I will be discussing and explain the two types of flows and how they affect the business world. By having this valuable information, consumers will now be aware of how their money is affecting the economic system in a certain way. Closed System A closed system is an economic system model that counts only domestic exchanges but not the foreign agents . This means that in a closed system, the money is built up inside a circular flow. In a closed system, there aren’t any leaks because there aren’t any foreign agents, governments, investments, or system of savings. Also there are not taxes, savings, or extra expenses that aren’t generated back into the economy. An example of a......

Words: 985 - Pages: 4

Premium Essay

Macroeconomic Terms

...University of Phoenix Material Macroeconomic Terms Define the following terms in your words. |Term |Definition |Definition Source | |Gross Domestic |Gross Domestic Product | | |Product (GDP) |(GDP) is a way to measure| | | |how well a nation’s |Goss Domestic Product - GDP | | |economy is doing. This is| | | |the value of money after | | | |the goods and services | | | |are calculated during a | | | |certain time. | | |Real GDP |Real GDP is the whole ......

Words: 564 - Pages: 3

Premium Essay

Macroeconomics Essay

...Running Head: Macroeconomics Jaque Mcilwain August 9, 2012 Morales Macroeconomics Class Thursday 6pm Abstract I will be discussing the two types of circular flow diagrams: One that represents the flows in the macro-economy as closed system and one that represents the flow as an open system. Circular Flow Diagrams. Circular flow diagrams are an economic model that illustrates the way a countries money flows or the way a country operates. There are two different kinds of flow charts and they are classified as an open system and a closed system. An open economy is basically a country that is completely reliant on and influenced by other countries and their economies. In other words most of their flow of money is based on what other countries are doing to generate income and operates off how the other countries money flow through the economy. A closed economy is self-reliant and is not influenced by what goes on in other countries or by what goes on outside of their economy. In other words this economy relies on itself when taking into account about the way money flows. An example of an open economy is really the world by default. If any nation trades with another country then they are known as an open economy by default. The United States and Great Britain are great examples of an open economy because they are highly dependent upon importation and exportation of goods and the industry. An example of a closed economy would be North Korea an enemy of the United......

Words: 682 - Pages: 3

Premium Essay


...02. ECONOMIC SYSTEMS – DEFINITIONS AND CHARACTERISTICS - CAPITAL ECONOMY – SOCIALIST ECONOMY – MIXED ECONOMY C. ECONOMIC SYSTEMS i) Circular Flow of Goods and Money in an Economic System Every economy is a system in which the production of many goods is organized to satisfy many wants of human beings. In an economic system, the two economic units namely households and enterprises are linked by a circular pattern of economic activities as illustrated in Figure 1.1.The choices and decisions of these two main units are the deriving forces of economic activity. Money Payments for Consumer Goods and Services Consumer Goods and Services-Food, Clothing etc (Output of Business Sector) HOUSEHOLDS 1) Consume final goods and services produced by business sector. 2) Provide inputs (labour and BUSINESSES OR ENTERPRISES 1) Provide goods and services to consumers. 2) Use resources (inputs) provided by households. capital) to business firms. Economic resources–land, labour and capital (inputs of business sector) Money: Payments Goods, Services, Resources and Money Salaries, in a Simpleand Profit Figure The flow of for Resources-Rent, Wage and Payments Interest Economy Fig. 1.1: The Flow of Goods, Services, Resources and Money Payments in a Simple Economy. In their households, people make two sets of decisions: a) selling the inputs they own, primarily their labour and b) buying goods with their incomes. The enterprises or businesses engage in production, using the labour and other......

Words: 1180 - Pages: 5

Premium Essay

Four Sector Economy Model.Doc

...domestic product (GDP) or gross domestic income (GDI) is a measure of a country's overall economic output. It is the market value of all final goods and services made within the borders of a country in a year. It is often positively correlated with the standard of living, though its use as a stand-in for measuring the standard of living has come under increasing criticism and many countries are actively exploring alternative measures to GDP for that purpose. GDP = private consumption + gross investment + government spending + (exports −imports), or [pic] Methods of computing GDP: There three types of methods of computing GDP; ➢ Production Method ➢ Income Method ➢ Expenditure Method Expenditure Method: This method can be explained by different types of economy sector model. E.g.: ➢ One sector economy model: Y = C ➢ Two sector economy model: Y = C+S = C + I ➢ Three sector economy model: Y = C + I+ G ➢ Four sector economy model: Y = C+ I +G + NX Where, Y = National Income C = Consumption I = Investment G = Government NX= Net Export. Four Sector economy model: In four sector economy model national income is measured by adding consumption, investment, government expenditure & net export Y = C+ I +G + NX Assumption: The basic circular flow of income model consists of following assumptions: ➢ The economy consists of four......

Words: 1403 - Pages: 6

Free Essay

Econ Ch. 2 Notes

...Chapter 2 Circular-Flow Diagram- a visual model of the economy that shows how dollars flow through markets among households and firms Production Possibilities Frontier- a graph that shows the combinations of output that the economy can possible produce given the available factors of production and the available production technology Microeconomics- the study of how households and firms make decisions and how they interact in markets Macroeconomics- the study of economy-wide phenomena, including inflation, unemployment, and economic growth Positive Statements- claims that attempt to describe the world as it is Normative Statements- claims that attempt to prescribe how the world should be The Economist As Scientist Economists view subject with objectivity devise theories, collect data, analyze data use scientific method The Scientific Method: Observation, Theory, And More Observation interplay between theory and observation experiments difficult in economics: have to look to history allows us to examine present and predict future The Role Of Assumptions economists make assumptions to make the world easier to understand two countries, two goods applying correct assumption to right data different assumptions for short0run and long-run effects of a change in the quantity of money Economic Models models not often real but are accurate and helpful economists use diagrams and equations omit details to show what’s truly important models are built with......

Words: 642 - Pages: 3

Premium Essay

Explain Briefly How Macroeconomics Is Different from Microeconomics. How Can Macroeconomists Use Microeconomic Theory to Guide Them in Their Work, and Why Might the Wish to Do so? Please Give Examples.

...Introduction All economic problems arise from scarcity because human wants are unlimited but resources are limited. Economics the science of choice, it is talking about how individuals and societies make a choice from the scarcity. All economic choices can be summarized in three questions: What gets produced? How is it produced? Who gets what is produces? Economists define their work in micro and macro perspective. Microeconomics and Macroeconomics are the two major branches of economics. What is Microeconomics? Microeconomics is the study of how households and firms make decisions and how they interact in markets. So all these problems belong to microeconomics: how the consumer reacts when price changes; how the firms decide the output level and how they decide the production method; how should the firms charge their product prices. Microeconomics also considerate the demand and supply of individual goods and services and the equilibrium occurs when the quantity of demands are equal to the quantity of supplies. A typical example of microeconomics is a mobile phone manufacturer decides to charge what price of their new model of smart phone depends on the demand of the mobile markets. A number of factors would affect the demand of the mobile phone including the price of the product itself, the income of the consumer, the consumer’s amount of accumulated wealth, the price of other competitor’s product, the consumer’s tastes and preferences and the......

Words: 1205 - Pages: 5

Premium Essay

Consumer Consumption In The Economy

...called the Nominal GDP. The prices change from the inflation or deflation are not adjusted to the Nominal GDP statistics account. It doesn’t matter if they are local or foreign-owned companies. As long as the production is located within the country’s boundary, the government will take it as GDP too. For example, the debts are presented and calculated as a nominal figure, therefore, the debt-to-GDP ratio are due to the Nominal GDP. Its is because it can give us the inaccurate view of the country economy growth when the inflation is baked into the figure of the Nominal GDP.Economics is the use of resources that have alternative uses. Consumers need resources to fulfil desires. The economics has been divided into microeconomics and macroeconomics. Microeconomics is the combination word of ‘micro’ and ‘economics’ that means the study of the small individual unit. Microeconomics is known as how individuals and societies uses the resources to the production of goods and services to satisfy unlimited wants. The decision made by individuals, business and government. Microeconomics focus on supply and demand in the economy, and the price may affect. It seeks to explain how...

Words: 1080 - Pages: 5

Premium Essay


... |15% | |5. |Business Maths |10% | |6. |Business Statistic |10% | |7. |HRM |10% | |8. |Business Communication and Report Writing |10% | |9. |Micro Economics |5% | |10. |Macro Economics |5% | | |Total |100% | |Management Sciences...

Words: 825 - Pages: 4

Premium Essay

W1 A2

...Week 1 Assignment 2 Basic Economic Concepts Principles of Macro-Economics Shacara Wyatt South University Online Absolute and Comparative Advantage An absolute advantage is the ability to produce a good or service while using minimum resources than any other producers (Hall & Liberman, 2014). The benefits of the international trade from absolute advantage is the fact that each country has an advantage in various goods and services. This advantage also has benefits for international trade, individuals have the opportunity to improve their economic welfare by making themselves specialized in the production of good or service that the nation has an absolute advantage and then exporting the goods and services to the other countries (Hall &Liberman). Which results in them having the availability to import goods or services from those countries that had an absolute advantage in producing those goods (Hall & Liberman, 2014). “Invisible Hand” Invisible hand is a phrase used by Adam Smith to explain how people in the market, in order to pursue their self-interest, are led by an “invisible hand” to promote the well-being of the entire community (Baumol & Blinder, 2014). Invisible hand has an important role in making decisions, as in a competitive market in which consumers have a choice to pick their product. Circular Flow Model components * Household: Households get income from factor market by selling their land, labor, and capital entrepreneurship.......

Words: 622 - Pages: 3

Free Essay

Keynesian Economics

...John Maynard Keynes’ influence and ideology Even today John M. Keynes’ ideas remain crucial to the most important debate of our time: how can we escape from the economic crisis? Should governments borrow and spend their way out of trouble or slash spending and reduce the national debt? Despite Keynes’ avid support for the free market, his theory is one strongly based on the mixed-market economy. “Keynes said it was possible for governments to come in and make markets work better... Keynes saved capitalism from the capitalists.” - Prof. Joseph Stiglitz Keynes’ theory opposed Adam Smith’s metaphor of “the invisible hand” – which envisages a self-correcting economy, in the form of the self-regulating behaviour of the market - due to individuals' efforts to maximize their own gains in a free market which benefits society, even if original ambitions include no benevolent intentions. Instead Keynes said that capitalism doesn’t always work on its own accord, but that government intervention is sometimes necessary (especially during periods of recession – which Keynesians see as an “economic malady” rather than a normal part of the business/trade cycle. Keynesian theory in modern macro-economics Alistair Darling MP, Chancellor of the Exchequer, 2007-2010 – “The dominant thinking in Europe at the moment is exactly repeating the mistakes (I believe) that were made at the end of the First World War”. This statement was......

Words: 1016 - Pages: 5

Premium Essay

Microeconomics Chapter 1-6 Key Points

...Luz Figuereo Professor Allen Sauberman March 7, 2012 Paper #1 Chapter 1 Key Points: 1. Economics is the study of choices we make among our many wants and desires given our limited resources. 2. Self-interest is not the same as selfishness. For example, Mother Theresa who spent her life caring for others, her work could be considered done because of her self-interest but who would consider it selfish. 3. Ceteris Paribus which means “holding everything else constant”. Basically when trying to asses the effect of one variable on another, you must keep the relationship between the two variables isolated from other words. 4. Fallacy of composition states that if something holds true to one person it does not necessarily mean it would be true for many individuals in a group. 5. Positive statements are attempts to describe what happens and why it happens, while normative statements are attempts to prescribe what should be done. I understand what economics is and the basis of how and why economists try and predict the behavior of the consumers. How they observe, and come up with a hypothesis. I also understand the differences between macroeconomics and microeconomics. Lastly, what would be considered macro and what would be considered micro. Chapter 2 Key Points: 1. Human capital is the productive knowledge and skill people receive from education, on the job training, health and other factors that increase productivity. 2. Opportunity cost is......

Words: 1243 - Pages: 5

Premium Essay

Economic Issues

...Economic Assessment: Outcome 2 &3 [Pick the date] 1a).What is Gross Domestic Product? GDP stands for Gross Domestic Product. GDP is the monetary value of all goods and services produced in a country within a given time period. Any goods or services produced outside the specified country is not included the country’s GDP. GDP is usually used as an indicator of an economy’s health and it also measure a country’s standard of living. GDP is often calculated quarterly and yearly and is used as a comparison to the previous quarter or year. GDP is composed of overall consumption of the country, government spending, investments and net exports (exports – imports). The formula for calculating is GDP = C + I+ G + (X-M). b).Distinguish between real gross domestic product and nominal gross domestic product. Nominal Gross Domestic Product is a monetary measure of the value of finished goods and services produced for a period of time (quarterly or annually). Nominal GDP does take inflation into consideration. Real Gross Domestic Product calculates the value of economic productivity in a given year accustomed for changes in price. It takes into consideration inflation before giving results. Real GDP is very different from Nominal GDP. This is proven below: 1. Nominal GDP does take inflation or deflation into consideration in its calculation whereas Real GDP is obtained only after including the effect of inflation or deflation. 2. Nominal GDP is calculated at......

Words: 1771 - Pages: 8