Introduction To Macroeconomics

• Circular Flow Model


  Model that shows relationship between sectors and markets in economy
• What you will learn

  • Simple Circular Flow Model
  • 3-Sector Circular Flow Model
  • 4-Sector Circular Flow Model
  • Leakage & Injection
• Simple Circular Flow


  • All Income received by household will be used to purchase GnS
  • Business sector will get back money they paid in factor market
• Economic Roles


  • Seller of factor of production
  • Buyer of factor of production
  • Seller of goods and services
  • Buyer of goods and service
• 1. Sector Circular Flow Model

  Government Sector<|>Provider of public goods<|>Situation where financial capital is exchanged<|>Diverts household's income from consumption expenditures into saving and make it available to the business sector as investment loans
• 1. Sector Circular Flow Model

  Government, business and households from other countries<|>Exports are domestically produced goods and services demanded by the foreign sector<|>Imports are goods and services produced by foreign sector but purchased by local customers
• Equilibrium


  Income = Spending = Output
• Leakages


  • Savings
  • Taxes
  • Imports
• Savings


  Part of household income not used for current consumption expenditure
• Taxes


  Part of household's income compulsory to be paid to the government
• Imports


  Goods and services produced by foreign sectors and purchased by local customers
• Injections


  • Investment Loan
  • Government Purchasing
  • Exports
• Investment Loan


  Loan given by financial institution to business to fund capital expenditure
• Government Purchasing


  Money by which government used to finance the production of public goods
• Exports


  Domestically produced goods and services demanded by foreign sectors
• Leakages < Injections


  The money inflow is greater than outflow
• High demand


  Shortages, increase production, hire more resources, higher income, economic growth
• Rapid increase in growth


  May lead to inflation
• Leakages ≠ Injections


  Disequilibrium
• Leakages > Injections


  The money outflow is greater than inflow
• Low demand


  Surplus, cut production, lay off resources, lower income, recession