Circular flow

• Macroeconomics


  the study of the economy as a whole, where economists study aggregates
• open economy


  One where there is international trade relations with other countries,and the foreign sector is included in the circular flow
• Closed Economy


  One where there is no international trade relations with other countries and the foreign sector is not included in the circular flow
• Real flow


  Real flow is the exchange of goods and services between the economic participants
• Money flow


  Money that is earned between the economic participants
• Market


  Is a mechanism that brings buyers and sellers together which makes the exchange of goods and services possible
• Savings


  Disposable income not spent for consumption
• Taxes


  Compulsory payment levied by the government on a citizen or business in a country
• injection


  Money that enters the circular flow,therefore regarded as an inflow of money into the economy
• Leakage


  Money that leaves the circular flow therefore regarded as an outflow of money in the economy
• Capital goods


  All the physical assets required to produce goods and services e.g. machinery and tools
• Consumer goods


  Refers to all semi-final and final goods purchased by the economic participants for the purpose of consumption
• Factor market


  Refers to a market where the factors of production are traded for the production of goods and services
• Financial market


  Facilities the lending and borrowing of funds between the economic participants who have funds and those who need it
• Money market


  The market for short term and very short term loans and savings
• capital market


  Market for long term savings and loans
• Foreign Exchange Market


  Market where currencies are traded
• Gross Domestic Product (GDP)


  Refers to the final value of goods and services produced within the borders of a country within a specific period of time
• Gross National Product (GNP)


  Refers to the value of all final goods and services produced by the permanent residents of a country within a specific period of time
• Production method


  Calculates the total value of all final goods and services produced within a country
• Income method


  Calculates the amount earned by the owners of the factors of production within a county
• Expenditure method


  Calculates the total amount spent on goods and services by the economic participants
• Gross capital formation


  Includes all the investment by firms on capital goods
• Consumption of fixed capital

  Is the depreciation in the value of fixed assets that occurs during the production method
• Subsidies


  Refers to the financial incentive or benefit received from the government to reduce the costs of the business
• Factor cost


  Refers to the costs incurred when producing goods and services;does not include taxes or any subsidies
• Basic prices


  Are the prices of goods and services after other taxes and production have been added and other subsidies on production have been subtracted
• Market prices


  Are the prices of goods and services after taxes on products have been added and subsidies on products have been subtracted and reflect the final prices that consumer will pay
• CPI (Consumer Price Index)

  Is an index that measures the price of a fixed basket of consumer goods and services over a period of time
• Multiplier


  Process refers to a situation where a small increase in aggregate spending causes a disproportionally larger increase in aggregate income
• Value of the Multiplier


  Is the number by which the change in international spending must be multiplied to determine the changing income the symbol (K) is used to denote the multiply
• Marginal Propensity to Consume (MPC)


  Refers to the proportion of additional income that households choose to spend on consumer goods and services
• Marginal Propensity to Save (MPS)


  Refers to the portion of additional income that households choose to save
• Autonomous consumption


  Refer to the portion of income that consumer has available to spend for their needs and once
• Circular flow diagram


  A model that shows how participants in an economy interact
• Participants in a closed economy

  • Households
  • Businesses
  • Government
• Open economy


  An economy that trades with other countries
• Closed economy


  An economy that does not trade with other countries
• There is no country that does not trade with other countries nowadays
• Participants in an open economy

  • Households
  • Businesses
  • Government
  • Foreign sector