circular flow of income and expenditure
Post on 19-Oct-2014
10.829 views
DESCRIPTION
Circular flow of income and expenditureTRANSCRIPT
![Page 1: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/1.jpg)
MacroeconomicsMacroeconomics20122012
Prof Michael T. NoelCollege of Business Administration Education
![Page 2: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/2.jpg)
Topics:Topics:
Definition of MacroeconomicMacroeconomic problemCircular flow of income and
expenditure
![Page 3: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/3.jpg)
What is macroeconomics?What is macroeconomics?
Macroeconomics: analysis of the economy as a whole.
Factors affecting macroeconomics output (GDP or GNP)a. consumption expenditureb. Investment expenditurec. Government expenditured. Balance of payment
![Page 4: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/4.jpg)
The Economic ProblemThe Economic Problem::
How do we use scarce resources to best satisfy unlimited human wants?
![Page 5: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/5.jpg)
Illustration of Illustration of macroeconomic problemsmacroeconomic problems
Input:a.Consumption expenditureb.Investment expenditurec.Government expenditured.Balance of payment
Output:GDP/GNP
![Page 6: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/6.jpg)
GROSS DOMESTIC GROSS DOMESTIC PRODUCTPRODUCTThe market value of all goods and services
produced within a country in a given period of time.
It can be measured as all the EXPENDITURES to buy the goods and services produced.
It can also be measured as all the INCOME earned from producing the goods and services.
Since every peso spent is someone’s income, the two measures give the same result.
![Page 7: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/7.jpg)
Flow of income and Flow of income and expenditure is present in expenditure is present in every economic activitiesevery economic activities
A. ConsumptionB. ProductionC. TaxationD. Transfer of paymentE. ImportationF. Exportation
![Page 8: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/8.jpg)
Gross Domestic Product Gross Domestic Product The circular flow diagram shows the transactions among households, firms, governments, and the rest of the world.
![Page 9: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/9.jpg)
Gross Domestic Product Gross Domestic Product Firms hire factors of production from households. The blue flow, Y, shows total income paid by firms to households.
![Page 10: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/10.jpg)
Gross Domestic Product Gross Domestic Product ◦Households buy consumer goods and services. The red flow, C, shows consumption expenditures.
![Page 11: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/11.jpg)
Gross Domestic Product Gross Domestic Product Households save, S, and pay taxes, T. Firms borrow some of what households save to finance their investment.
![Page 12: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/12.jpg)
Gross Domestic Product Gross Domestic Product ◦Firms buy capital goods from other firms. The red flow I represents this investment expenditure by firms.
![Page 13: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/13.jpg)
Gross Domestic Product Gross Domestic Product ◦Governments buy goods and services, G, and borrow or repay debt if spending exceeds or is less than taxes
![Page 14: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/14.jpg)
Gross Domestic Product Gross Domestic Product The rest of the world buys goods and services from us, X and sells us goods and services, M—net exports are X - M
![Page 15: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/15.jpg)
Gross Domestic Product Gross Domestic Product And the rest of the world borrows from us or lends to us depending on whether net exports are positive or negative.
![Page 16: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/16.jpg)
Gross Domestic Product Gross Domestic Product ◦The blue and red flows are the circular flow of income and expenditure. The green flows are borrowing, lending, and taxes.
![Page 17: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/17.jpg)
Gross Domestic Product Gross Domestic Product
The sum of the red flows equals the blue flow.
![Page 18: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/18.jpg)
Gross Domestic Product Gross Domestic Product
◦That is: Y = C + I + G + X - M
![Page 19: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/19.jpg)
ExpendituresExpendituresExpenditures are purchases of goods
and services.Expenditures are
◦ Consumption (C)◦ Investment (I)◦ Government spending (on goods and
services) (G)◦ Net Exports (X-M)
Exports (X) Imports (M)
![Page 20: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/20.jpg)
Expenditures equal Expenditures equal IncomeIncomeExpenditures= C + I + G + X – M
All expenditures become someone’s income so
Y (income) = C + I + G + X – M
![Page 21: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/21.jpg)
GovernmentGovernmentGovernment spending:
◦ Goods and services (G) Roads, health care, education, helicopters, police
officers salaries, judges salaries.Government revenue:
◦ Taxes◦ (Income from Crown corporations)◦ (Tariffs)◦ Less Transfers to persons (part of net taxes)
GST rebates, unemployment insurance, pensions, subsidies
Interest on the debt (substantial) NOTE: The gov’t is not buying services, so
transfers are not an expenditure.
![Page 22: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/22.jpg)
Budgetary Deficits and Budgetary Deficits and SurplusesSurplusesSpending
◦ Goods and services (G) + Transfers to persons (Tr)
Revenue◦ Taxes (Tx)
Net Taxes◦ Tx – Tr = NT
Surplus G + Tr < Tx G < Tx – Tr G < NT
Deficit G + Tr > Tx G > Tx – Tr G > NT
![Page 23: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/23.jpg)
Savings and InvestmentSavings and InvestmentInvestment is financed by savings
Savings have three sources:◦Savings by households
The part of income households do not spend on consumption or net taxes.
(S = Y - C - NT)◦Savings by governments
NT – G = savings◦Savings of foreigners
M – X = foreign borrowing
![Page 24: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/24.jpg)
STOCKS AND FLOWSSTOCKS AND FLOWSFLOWS
◦ Income : the goods and services produced each year
◦ Deficits: The excess of spending over income each year
◦ Investment: Goods produced to be used in production each year
◦ Surpluses: The excess of revenue over expenditures each year.
STOCKS◦ Wealth: All the
goods a person owns. Wealth is the sum of past net saving.
◦ Debt: the sum of all past deficits less all past surpluses
◦ Capital: All the investment goods owned. Capital is the sum of past net investment
![Page 25: Circular flow of income and expenditure](https://reader033.vdocument.in/reader033/viewer/2022061105/5443cc1cafaf9fac098b4665/html5/thumbnails/25.jpg)
Study wellStudy well