Circular Flow and Intro to Macroeconomics
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The document summarizes key concepts of macroeconomics including the circular flow model. The circular flow model shows how money flows between households and firms through factor payments and the purchase of goods and services. Firms utilize resources from households like labor, capital, land and entrepreneurship to produce goods and services. This generates income for households which they can use to purchase goods and services from firms. There are also inflows and outflows in the circular flow from sectors like government, investment, exports and imports that affect income and spending in the economy. The circular flow framework helps explain the interdependence between production and consumption in the macroeconomy.
Circular Flow and Intro to Macroeconomics
- 2. CIRCULAR FLOW DIAGRAMis a visual model of the economy that shows how money flows through markets among households and firms.
- 3. PRODUCTION,RESOURCES, &INCOMEFACTORS OF PRODUCTIONLand (rent)
- 5. Capital (interest) ; and
- 6. Entrepreneurship (profit)INTEGRATING PRODUCTION&AND CONSUMPTIONMoney creates income every time it changes hands in the market system. On the other hand, the amount of money available for use in the two-household economy is not equal to income. Income is a FLOW concept as it is generated and measured for a period of time. Wealth is a STOCK concept as it refers to all materials which possess economic value owned by the populace.
- 7. PRODUCTION UNITS &AND CONSUMPTION UNITS Production is organized by FIRMS and not HOUSEHOLDS.
- 8. HOUSEHOLDS are resource owners (land, labor, capital, entrepreneurship)
- 9. FIRMS produce goods and services by utilizing the economic resources.PRODUCTION UNITS &CONSUMPTION UNITS In this model, funds flow from FIRMS to HOUSEHOLDS, producing MONEY INCOME (wages, rentals, interests, and profits) for the HOUSEHOLDS arising from the use of resources.
- 10. HOUSEHOLD AND INTERDEPENDENT PRODUCTION UNITSNot all firms produce consumer goods and there are stages of production to undergo to produce a final product or output.
- 11. Concept of Value Added: For each stage in the production process adds to the value of the final product.
- 12. It is the production of final goods and services that is relevant in arriving at national incomeTHE CIRCULAR FLOW In reality, there are OUTFLOWS (Leakages) from and INFLOWS (INJECTIONS) into the circular flow.INJECTIONS AND LEAKAGESIt is a fact that not all income and expenditures circulate continuously.The Circular Flow of Economic Activity
- 13. 9 of 465-SECTOR CIRCULAR FLOWEXPORTS (X)GOVERNMENT SPENDING (G)INVESTMENT (I)BANKSGOVERNMENTREST OF THE WORLDSAVINGS(S)TAXES(T)IMPORTS(M)INFLOWS: Investment (I), Government Spending (G), and Exports (X)S + T + M = I + G + X or OUTFLOWS = INFLOWSOUTFLOWS: Savings (S), Taxes (T), and Imports (M)