Macro-economics Circular Flow Of Money

Macro-economics

Economics The study of choices people make to satisfy their unlimited wants and needs. Macro-economics – the study of choices made by countries or governments to satisfy their unlimited wants and needs

3 Types of Economies Traditional Command Market Free Enterprise

5 Features of Free Enterprise 1.

The right to own private property and enter into contracts

2.

Make individual choices

3.

Engage in economic competition

4.

Make decisions based on self-interest

5.

Participate in the economy with limited government involvement and regulation

U.S. Economic Goals 1. 2. 3. 4.

5. 6.

Freedom (Choice) Efficiency (make best use of scarce resources) Equity (fairness) Security (protect the economy from situation that would harm the economic well being of individuals and the nation) Stability (full employment and stable prices) Growth (increase the amount of goods and services produced)

The Circular Flow Model

Stable Economy If all income is spent business will sell all goods, and will be induced to produce all goods again

Circular Flow - Simple Model Resource Income

$$$ Productive Services

Businesses

Households

Goods and Services

$$$ Spending for Goods and Services Circular Flow Movie

Circular Flow of Goods and Services Money Payments Taxes services

Products Product Market – all of the goods and services exchanged in the economy

Money payments Products Circular flow

Circular Flow of Goods and Services Services

Labor Money Payments

Taxes Resource Market – Exchange of resources between households and the users of resources (businesses and government) Labor Income Circular flow

Leakages and Injections Leakages in the circular flow savings taxes Injections in the circular flow investment government spending

Flow with Leakages/Injections Resource Income

Businesses

Loanable Investment Funds

Spending

Government

Saving

Taxes

Spending for Goods and Services

Households

Government and the Circular Flow •Balanced budget: – amount spent by government = amount collected in taxes

•Surplus budget – amount spent by government = less than that collected in taxes

•Deficit budget – amount spent by government = more than that collected in taxes

International Trade and the Circular Flow IMPORTS are a leakage EXPORTS are an injection If exports = imports, the circular flow is in balance Usually it is not balanced called a trade deficit, because imports (leakages) are greater than exports (injections)

The Circular Flow Diagram The circular-flow diagram presents a visual model of the economy as coordinated by the four key markets. • First, the resource market (bottom loop) coordinates the actions of businesses demanding resources and households supplying them in exchange for income. • Second, the goods & services market (top loop) coordinates the demand •

(consumption, investment, government purchases, and net-exports) for and supply of domestic production (GDP).

Third, the foreign exchange market (top right) brings the purchases (imports) from foreigners into balance with the sales (exports plus net inflow of capital) to them. • Fourth, the loanable funds market (lower center) brings the net saving of households plus the net inflow of foreign capital into balance with the borrowing of businesses and governments. •

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Government’s Goal Make decisions that improve the economy Measure the economy to see how it’s doing Business Cycle – ups and downs of the economy ●

Helps experts predict what will happen to the economy

Business Cycle Four phases:

Phase 2 Boom Period

Phase 1

Phase 3

General Prosperity

Slow Down Phase 4 Recession Depression

Business Cycle Phase 1 – General Prosperity Economy going up People buying more goods and services Businesses producing more goods and services and hiring more employees

Business Cycle Phase 2 – Boom Period Economic activity at a peak Businesses working and selling at full capacity

Business Cycle Phase 3 – Slow Down People buying fewer goods and services Businesses cutting back production and laying off workers; some forced out of business

Business Cycle Phase 4 – Recession Production at lowest point High unemployment Reduced spending on goods and services ●

Depression – severe recession

Business Cycle Fiscal Policy – the way government taxes citizens and spends money Recession – gov’t spends more money or cuts taxes ●

Defense

●

Roads

●

Public housing

Business Cycle Monetary Policy – the way the government regulates the amount of money in circulation (Federal Reserve System) Raises and lowers interest rates

Measuring Economic Performance How many people are working this month? How much did consumers spend last year? How much money did the steel industry make last year? Answers to these question are called: Economic Indicators Because they indicate how the economy is performing

Gross Domestic Product (GDP) Most important indicator: Total value of all the goods and services produced within the nation each year ●

●

All cars, planes, tv’s, shoes, and so on in this country All the money spent on doctors, lawyers, car repairs, restaurant meal and so on in this country

Final versus Intermediate Goods Final Goods and Services Manicures Bread

Final versus Intermediate Goods Intermediate Goods Window glass in new automobiles Lumber in a new house Screws used in a cruise missile Flour for making bread Cloth for making dresses

GDP consists of three parts consumer goods and services, government purchases of goods and services, and investment goods. C = family (household) spending on and services

consumer goods

G = government purchases of goods and

services

I = spending by firms and households on new capital such as factories, tools, inventory increases or decreases, and new houses Gross Domestic Pizza Activity

Other Indicators Personal Income – before taxes Disposable Income – after taxes Indicates the “Standard of Living”

Inflation General rise in the price of goods and services Demand

Prices

EFFECT - prices rise

money buys less =

Decrease in the standard of living

Attempts to control inflation Raise interest rates = more expensive to borrow money Raise taxes and cutting spending = decrease in the amount of money in circulation Businesses supply more than demand = price drops Consumers save more than they spend = price drop