645560
Description
Mind Map by mikaela.farrugia, updated more than 1 year ago
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Created by mikaela.farrugia
about 10 years ago
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2.4 Part 2: The model’s four flows
- Four flows connect to the main household and
businesses who's value are measured in money over a
period of time
- Two relate to demand and two relate to supply
- Flow 1 - the supply of
resources
- Starting point for economic activity
- Household sector supplies
resources for firms
- Starting point for economic activity
- Flow 2 -total incomes or demand for resources
- Business sector demands resources by paying different
types of incomes to the household sector
- e.g.) labour = wages
- e.g.) labour = wages
- Money value of all
- Business sector demands resources by paying different
types of incomes to the household sector
- Flow #3 - total expenditure or aggregate demand
- some of the income from
households will be disposable
- influences total spending on Aus made
goods and services which is aggregate
demand (AD)
- influences total spending on Aus made
goods and services which is aggregate
demand (AD)
- Some income ends up as leakages that
lower AD while some are injections that
increase total spending
- Households
- most income is spent on private consumption of
goods and services such as food and entertainment
(C). C reenters the circular flow as part of AD.
- most income is spent on private consumption of
goods and services such as food and entertainment
(C). C reenters the circular flow as part of AD.
- Financial Sector
- some income is savings. Savings (S) is a leakage because
they lower the level of C. Financial sector may inject S back
into the model by lending it to firms to expand (I). Encourages
firms to buy plants and factories lifting AD.
- some income is savings. Savings (S) is a leakage because
they lower the level of C. Financial sector may inject S back
into the model by lending it to firms to expand (I). Encourages
firms to buy plants and factories lifting AD.
- Government Sector
- some income is used to pay taxes. Classified as leakages
from the model as they decrease C. Money from tax could
be put back into the flow if it is used to pay for gov
consumption and investment spending (G). Classified as an
injection and therefore provides a lift to AD.
- some income is used to pay taxes. Classified as leakages
from the model as they decrease C. Money from tax could
be put back into the flow if it is used to pay for gov
consumption and investment spending (G). Classified as an
injection and therefore provides a lift to AD.
- Overseas sector
- some income leaks out of the
Aus economy as spending on
imports (M). Could be partially
or fully replaced due to exports
(X). X is regarded as an
injection in addition to AD.
- some income leaks out of the
Aus economy as spending on
imports (M). Could be partially
or fully replaced due to exports
(X). X is regarded as an
injection in addition to AD.
- Households
- flow 3 is about the total value of expenditure
on Australian made goods and services. This
is AD and consists of the following equation
C+I+G+X-M.
- Spending on final goods and services
+ Investment Spending + Government
Spending + Export Spending - Import
Spending.
- We exclude M at the
moment because we
want to know the value of
spending on Australian
made items.
- We exclude M at the
moment because we
want to know the value of
spending on Australian
made items.
- Spending on final goods and services
+ Investment Spending + Government
Spending + Export Spending - Import
Spending.
- AD is affected by the number of leakages (S+T+M) relative
to the injections (I+G+X)
- Rise in leakages means a fall in AD.
Rise in injections means a rise in AD
- some of the income from
households will be disposable
- Flow #4 - the flow of final goods and services supplied (GDP)
- total value in money of
finished goods and
services produced by
the business sector over
a period of time.
- Flow reflects overall level of Aus economic
activity -measured by GDP
- Short to medium term means GDP is dictated by the value of AD (flow 3)
- long term- flow 1 is important as it has a direct affect on the
economies productive capacity.
- Circular flow model is affected by both aggregate supply and demand.
- total value in money of
finished goods and
services produced by
the business sector over
a period of time.
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