Essay About Circular Flow Model And Higher Income

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EconomicsIt is the study of how society chooses to allocate its scarce resources to the production of goods & services in order to satisfy unlimited wants.+ economics: analysis limited to statements that are verifiablenormative economics: analysis based on value judgementMacroBranch of economics that studies decision making for the economy as a wholeEg. A bigger picture (forest)MicroBranch of economics that studies decision making by a single economic unit, individual, household, firm, industry, level of govt (6)Eg. A smaller picture (trees) → specifically4 Macroeconomic Goals ***a steady growth of national outputhigh level of employmentstable price levelsatisfactory balance-of-paymentssteady growth of national outputoutput = incomegrowth rate has to be sustainable → so as to not disappoint pplsteady growth implies higher sales & revenue to bizin the circular flow model, higher sales means higher income for householdsresults to better standard of livinghigh level of employmentmeans more jobs are created in a country, more ppl employedbenefit from receiving income from jobshigher income, better standard of livinghowever, we measure unemployment ratestable priceshelps maintain the purchasing power → ability to buy things (FOR PPL)helps to remove uncertainties (unpredictability) → (FOR BIZ)satisfactory BOPrefers to country’s transactions with other countriessatisfactory BOP = country in good financial conditiontransactions thru: tradedirect foreign investmentfinancial transactionFactors of productionland (natural resources)labour (workers)capital → man-made goods used for production (machinery, eqpt)entrepreneurship → special type of labour (mktng & management)Factors of paymentland: rentlabour: salarycapital: interestentrepreneurship: proftsoutput = income = expenditurenet exports= exports – imports4 sectors of an open economyhouseholdsbusinessesgovernmentforeign sectorCircular Flow of Incomerefers to the flow of goods & services (including financial assets & factor services) & payments in the economy2-sector circular flow modelhouseholdsbusinesseshas  4 items in the diagramreal side(CW) of the economy, g&s flow from firms → householdsmonetary side(ACW) of the economy, payments for factors of production eg wages, rent, interest, profits flow from firms → householdsreal side(CW) of the economy, FOP flow from households → firms eg land, labour, capital, entrepreneurshipmonetary side(ACW) of the economy, expenditure of g&s from households → firms4-sector circular flow modelhouseholdsbusinessesgovernmentforeign has 7 items in the diagramGDP (Gross Domestic Product)it is the market value of all final goods & services in a nation during a period of time (usually 1 year)intermediate goods not includedExpenditure Approach*GDP = C(from homes) + I(from biz) + G(from govt) + (X-M)Income ApproachGDP = rent + wages + interest + profit