Commerce 1

• Economy


  The system of production, distribution, and consumption of goods and services in a particular geographic region
• Participants in the economy

  • Consumers
  • Business
  • Government
  • Financial institutions
  • Overseas sector
• Five-sector circular flow model


  • Shows the interdependence between different sectors of the economy
• Business cycle


  1. Economic expansion

  2. Economic contraction
• Injection


  Introduction of income into the flow of the economy, such as additions to investment, government expenditure and exports
• Leakage


  Withdrawal of income from the flow of the economy, such as savings, taxation and imports
• When injections into the economy are greater than the leakages


  The economy is expanding
• When leakages from the economy are greater than the injections


  The economy is contracting
• Economic growth is calculated as the change in real GDP over time
• If the Government decides to raise taxes on Households

  • Households will have less disposable income and may choose to cut down on their spending and the amount of money that they save
  • Firms are likely to receive less revenue, as a result of reduced consumer spending
  • The Government will receive more tax revenue and, if they increase their spending, this would increase demand for the goods and services that firms produce
  • If Households reduce their savings, the Financial sector will have less funds to lend out to support investment
• The Financial sector can facilitate business investment
• Disposable income


  The amount of money that households have available to spend or save after taxes and other deductions
• Households reduce their disposable income


  They may choose to cut down on their spending and the amount of money that they save
• Firms receive less revenue


  As a result of reduced consumer spending
• Firms receive less revenue


  They may choose to decrease production or even reduce the number of workers
• The Government receives more tax revenue

  If they increase their spending, this would increase demand for the goods and services that firms produce
• The Government increases spending

  This is likely to increase employment
• Households reduce their savings


  The Financial sector will have less funds to lend out to support investment
• The Financial sector directs the flow of savings into the economy which, in turn, helps to facilitate the accumulation of capital and the production of goods and services
• Funds are channelled from savers to borrowers to facilitate investment by Firms and Households
• Businesses rely on banks lending them money so they can use those funds to invest in things like new equipment to increase production
• Households rely on banks lending them money so they can use those funds to invest in assets (like property) or increase their consumption today
• If there is instability in the financial sector

  Banks are less inclined to lend money as they worry that Firms and Households will not be able to pay them back, making it harder for firms and households to access credit (money) and reducing the amount of investment
• If there is instability in the financial sector


  Firms and Households are less likely to deposit their money into, or borrow from, banks, so there is less investment