Circular Flow Chart Ap Econ

AP Economics Presentation Circular Flow Chart By Triwit Ariyathugun Teacher Mr. J. Roderick Eaton 02/25/2009

The Circular Flow Diagram • The way to see the economic interactions among main sectors in the economy is through a circular flow diagram. • The circular flow diagram shows three links between the domestic economy and the rest of the world. Three links are - Imports - Exports - A flow of funds borrowed from foreign lenders

Regarding this circular flow, there are seven sectors of the economy in the • • • • • • •

Household Firms Product Markets Factor Markets Financial Markets Government Foreign Economies

Circular Flow DiagramExports Product Markets

Consumption expenditure Governmen t Purchase

Financia l Markets Factor payments

Factor Markets

Saving

Household s

Lo for ans f fin eign rom an er ce s t tra o de de fi

Investment Funds

Government Borrowing

Firms

Net Taxes

cit

Governmen t

Imports

National product Investment Expenditure

Foreign Economie s

National Income

Household • Receive - “national income” from their work - transfer payments: social security benefits, veteran benefits, and welfare payments • Consume -“C” : Consumption Expenditure (part of GDP) - Pay taxes to government - Save by putting money in financial markets

Firms

• Receive - national product from product markets - investment funds from financial markets • Pay - factor payments to factor markets

Foreign Economies

• Receive • Pay

- Money from imports - Exports to product markets - Loans to finance trade deficit

Product Markets • Receive - money from Consumption Expenditure - money from Government Purchases - money from Investment Expenditure - Exports to foreign economies • Pay

Factor Markets • Receive - Factor payments from firms • Pay - National income to households

Government • Receive - Money from net taxes paid by households - Borrow money from financial markets • Pay - Pay Government Purchase to buy

Financial Markets • Receive - Savings from household - Loans from foreigners to finance trade deficit from foreign economies • Pay - Pay government due to “government borrowing” - Pay requested “Investment funds” to firms

GDP (Gross Domestic Product) • J.R.E.’s Definition: The Dollar Value of the total amount of final goods + services produced in a country annually. • GDP (F!) = C+I+G+ (Ex-Im) • C = Personal Consumption Expenditure • I = Gross Private Domestic Investment • G = Government Consumption and Gross Investment

GDP = C+I+G+ (Ex-Im)

Exports Product Markets

Consumption expenditure Governmen t Purchase

Financia l Markets Factor payments

Factor Markets

Saving

Household s

Lo for ans f fin eign rom an er ce s t tra o de de fi

Investment Funds

Government Borrowing

Firms

Net Taxes

cit

Governmen t

Imports

National product Investment Expenditure

Foreign Economie s

National Income

Fun Facts… • Consumption Expenditure (C) is the largest and most stable component of GDP. It adds up approximately twothirds of GDP. • Investment Expenditure (I) is considered the most volatile factor of GDP.

Leakages and Injections • The leakage-injection approach to equilibrium output focuses on saving and gross exports as spending injections. Leakages depress aggregate spending, while injections increase aggregate spending. • Leakages = Savings + Taxes + Import • Injection = Investment Expenditure

- Leakages = S + Product Markets

Consumption expenditure Governmen t Purchase

Governmen t

Financia l Markets Factor payments

Factor Markets

Saving

Household s

Lo for ans f fin eign rom an er ce s t tra o de de fi

Investment Funds

Government Borrowing

Firms

Net Taxes

Imports

National product Investment Expenditure

Exports

cit

T+M - Injections = I +

Foreign Economie s

National Income

The point where the leakage and the injection graphs cross represents the “Equilibrium GDP (Ye).”

The End 250 + 25 = 275