Transcript circular flow of income - nagleeco-2009

Five Sector Circular Flow of
Income Model
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Why does economics matter?
http://www.miniature-earth.com/me_english.htm
Examine the economic cycles
Explore how income flows impact on the
economic cycle
• http://tutor2u.net/economics/presentations/aseco
nomics/macro/EconomicCycle/default.html
• Update wiki – glossary of terms
Income rewards
Businesses
Individuals
expenditure
In a simple economy economic activity occurs
between individuals and businesses
Identify the income flows between the two
sectors in this simple economy.
Income rewards
Businesses
Individuals
expenditure
arewe
theare
income
flows
As So,
economists,
Butwhat
wait….there’s
more!!!
aware
that
between
individuals
another
sector
exists. and
Any businesses
idea what
and
Government?
thisthe
might
be???
taxation
Governments
expenditure
Income rewards
Businesses
Individuals
expenditure
savings
taxation
Financial Institutions
Governments
investment
expenditure
Financialthe
institutions
are another
within
Identify
income flows
betweensector
individuals
our economy.
and
businesses and financial institutions.
Income rewards
Businesses
Individuals
expenditure
Anything
We are not
else?????
alone!!!
savings
taxation
imports
Financial Institutions
Governments
investment
expenditure
exports
International Flows
Identify the income flows between the two sectors
and the international economy
Do you remember how many sectors there
were?
Hence, why this model is commonly referred
to as The Five Sector Circular Flow of
Income model
Individuals
Businesses
Financial Institutions
Governments
International Flows
Savings, taxation and spending on imports
remove money from the economy.
These are referred to as leakages.
Leakages reduce the amount of money in
our economy.
Investment, expenditure and exports add
money to the economy.
These are referred to as injections.
Injections increase the amount of money in
our economy.
Equilibrium occurs in the circular flow of
income when:
Leakages = Injections
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Equilibrium occurs in the circular flow of
income when:
Leakages = Injections
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What are the
leakages?
•Savings (S)
•Taxation (T)
•Imports (M)
What are the
injections?
•Investment (I)
•Expenditure (G)
•Exports (X)
Equilibrium occurs in the circular flow of
income when:
Leakages = Injections
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Therefore, we can state that
Savings + Tax + Imports = Investment + Expenditure + Exports
S+T+M=I+G+X
Insert these figures into the formula to
determine where the economy is in the
•economic cycle.
What
would
be
the
Savings (S) $20
impact of an increase in
Taxation (T) $50
expenditure? (similar to
Imports (M) $60
Investment (I) $40
Expenditure (G) $80
Exports (X) $10
Kevin Rudd’s $42bn stimulus
package announced on 3 Feb)
S+T+M=I+G+X
When total leakages exceed injections, an
economic downturn will occur.
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When total injections exceed leakages, an
economic upturn will occur.
Homework
Glossary
of
terms
on
the
wiki
•
Prelim Topic 1 handout – by Monday 16 Feb
Income rewards
Businesses
Individuals
expenditure
savings
taxation
imports
Leakages
Financial Institutions
Governments
International Flows
investment
expenditure
exports
Injections