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Five Sector Circular Flow of Income Model
• 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
BusinessesIndividuals
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
expenditure
BusinessesIndividuals
Governments
Income rewards
expenditure
taxation expenditure
As economists, we are aware that another sector exists. Any idea what
this might be???
So, what are the income flows between individuals and businesses
and the Government?
But wait….there’s more!!!
Financial Institutions
BusinessesIndividuals
Governments
Income rewards
expenditure
savings
taxation expenditure
investment
Financial institutions are another sector within our economy.Identify the income flows between individuals and businesses and financial institutions.
Financial Institutions
BusinessesIndividuals
Governments
Income rewards
expenditure
savings
taxation expenditure
investment
Anything else?????We are not alone!!!
International Flowsimports exports
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
Financial Institutions
BusinessesIndividuals
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
•
Equilibrium occurs in the circular flow of income when:
Leakages = Injections
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
Therefore, we can state thatSavings + 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.Savings (S) $20
Taxation (T) $50
Imports (M) $60
Investment (I) $40
Expenditure (G) $80
Exports (X) $10
S + T + M = I + G + X
What would be the impact of an increase in expenditure? (similar to Kevin Rudd’s $42bn stimulus package announced on 3 Feb)
•
When total leakages exceed injections, an economic downturn will occur.
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
Financial Institutions
BusinessesIndividuals
Governments
International Flows
Income rewards
expenditure
savings
taxation
imports exports
expenditure
investment
Leakages Injections
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