Transcript Chapter 15 - McGraw Hill Higher Education

PART 7
THE CIRCULAR FLOW AND
ECONOMIC FLUCTUATIONS
Chapter 15
The Circular Flow
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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Lecture Plan
• The exchange flow between households and the
business sector
–
•
The exchange flows with financial markets
–
•
The financial sector and the three-sector economy
The exchange flows between households,
businesses and government
–
•
The two-sector economy
The government sector and the four-sector economy
Exchange flows with other countries
–
The overseas sector and the five-sector (open) economy
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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The Circular Flow of Goods and
Money
• In a capitalistic/mixed economy money is used to
–
–
–
Buy and sell goods and resources in markets
Pay and collect taxes
Borrow and lend in financial markets
• The ABS structures the Australian national
accounts around the five sectors of the economy
i.e.
–
–
Businesses, households
Financial, government, overseas sectors
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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The Two-sector Model of the
Economy (Households and Firms)
• The households (consumers):
–
–
–
–
Require goods and services to satisfy their
personal wants
Own all resources (i.e. labour, capital, land, enterprise)
Sell resources to businesses
Gain income (e.g. wage, interest, rent, profit) from such
sales
• The firms/business sector (producers):
–
–
Uses resources provided by households to produce goods
and services
Sells those goods and services for income
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The Two-sector Model of the
Economy
• Assumptions:
–
–
–
–
Businesses are the only producers
All goods and services are sold to consumers
Consumers spend ALL their income on goods and
services
There are no resource inventories
• Therefore:
• Total demand (expenditure) = total supply (output)
• The economy will always be in equilibrium
(cont.)
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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The Two-sector Model of the
Economy (cont.)
• Two groups of decision makers
– Households (sell their resources)
– Firms (sell goods and services)
• Interaction between the two sectors through
markets:
–
–
Resource (factor) markets
Product markets
(cont.)
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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The Two-sector Model of the
Economy (cont.)
Productive resources
Factor market
Income
Household
sector
Firms sector
Goods and Services
Expenditure
Product
market
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In the Basic Circular Flow
O
= Y
=
E
Where:
O = output (production)
Y = income
E = expenditure (demand)
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The Financial Sector
• Saving (S) = Part of the Income that is not spent
(leakage)
• Total income = consumption spending + saving, i.e.
Y=C+S
• Investment (I) = that part of production that is not
used for current consumption, e.g. capital goods
Total income (Y) = C + I
• Investment is an injection. If:
S > I, the economy contracts
S < I, the economy expands
S = I, the economy is in equilibrium
• The financial sector acts as an intermediary
between lenders and borrowers
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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The Government Sector
• Government taxation (T) reduces households’
disposable income and business funds
Taxation (T) is a leakage (outflow)
• Government spending (G) includes expenditure on
collective goods and services and goods and
services provided by the business sector, plus
transfer payments (social security payments)
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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The Modified Five-sector Model of the
Economy
It is a five-sector model of the economy:
• The household sector
• The
firms sector
• The government sector
• The financial sector
• The external (overseas) sector
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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The Two-sector Model of the
Economy (cont.)
Income
Household
sector
Firms
sector
Expenditure
L
E
A
K
A
G
E
S
Savings
Taxation
Imports
Financial
sector
Government
sector
External
sector
Investment
Government
expenditure
Exports
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
I
N
J
E
C
T
I
O
N
S
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The Open Economy
• Total leakages (outflows) are S, T and M
• Total injections are I, G and X
• The impact of total leakages/injections on the
economic activity is as follows:
S + T + M = I + G + X equilibrium
S + T + M > I + G + X contraction
S + T + M < I + G + X expansion
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
15-13