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Topics: Economics, Investment, Tax Pages: 9 (1223 words) Published: June 21, 2013
PART 4 FUNDAMENTAL MACROECONOMIC CONCEPTS Chapter 8 The circular flow

Copyright © 2011 McGraw-Hill Australia Pty Ltd PPT slides to accompany Economics for Business 4e by Fraser, Gionea & Fraser

8-1

Lecture plan
• The exchange flow between households and the

business sector


The two-sector economy

• •

The exchange flows with financial markets


The financial sector and the three-sector economy

The exchange flows between households, businesses and government –

The government sector and the four-sector economy The overseas sector and the five-sector (open) economy



Exchange flows with other countries


Copyright © 2011 McGraw-Hill Australia Pty Ltd PPT slides to accompany Economics for Business 4e by Fraser, Gionea & Fraser

8-2

The circular flow of goods and money
• In a capitalist/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, that is:
– – – – –

Businesses Households Financial Government Overseas

Copyright © 2011 McGraw-Hill Australia Pty Ltd PPT slides to accompany Economics for Business 4e by Fraser, Gionea & Fraser

8-3

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 Uses resources provided by households to produce goods and services Sells those goods and services for income

• The firms/business sector (producers)




Copyright © 2011 McGraw-Hill Australia Pty Ltd PPT slides to accompany Economics for Business 4e by Fraser, Gionea & Fraser

8-4

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 (no stockpiles) Total demand (expenditure) = total supply (output) The economy will always be in equilibrium

• Therefore:




Copyright © 2011 McGraw-Hill Australia Pty Ltd PPT slides to accompany Economics for Business 4e by Fraser, Gionea & Fraser

8-5

The two-sector model of the economy
• 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

Copyright © 2011 McGraw-Hill Australia Pty Ltd PPT slides to accompany Economics for Business 4e by Fraser, Gionea & Fraser

8-6

The two-sector model of the economy

Figure 8.1
Copyright © 2011 McGraw-Hill Australia Pty Ltd PPT slides to accompany Economics for Business 4e by Fraser, Gionea & Fraser

8-7

The two-sector model of the economy
• In the basic circular flow model:

O

= Y

=

E

Where: O = output (production) Y = income E = expenditure (demand)

Copyright © 2011 McGraw-Hill Australia Pty Ltd PPT slides to accompany Economics for Business 4e by Fraser, Gionea & Fraser

8-8

The financial sector
• Saving (S): the part of the income that is not spent

(leakage) • Total income = consumption spending + saving
Y=C+S

• Investment (I): the 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

Copyright © 2011 McGraw-Hill Australia Pty Ltd PPT slides to accompany Economics for Business 4e by Fraser, Gionea & Fraser

8-9

The government sector
• Government taxation (T) reduces...
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