Presentation on theme: "The Circular Flow Model. Shows the economic transactions that occur between households, firms and other sectors in the economy. Money flows- We will only."— Presentation transcript:
The Circular Flow Model
Shows the economic transactions that occur between households, firms and other sectors in the economy. Money flows- We will only focus money flows as it is simpler than trying to account for the physical flows.
The Circular Flow of Income and Spending The simplest form of circular flow Households Producers Incomes $ rent wages interest profit $ Consumption Goods and Services Factors of production (Land, Labour, Capital
Introduction of the Financial Sector a b d c Households Producers Financial Institutions C (Payments for goods and services) Y (Income) S (savings) I (Investment)
The financial Sector Households do not spend all the income they earn they also save some. Savings = Income – Consumption Households usually save their income with banks. Banks then use this money to lend to firms. Firms then use these loans for investment (purchase capital)
Interest When firms borrow from banks they pay interest in return for these loans. Banks however, also pay interest to households for saving money with them. BUT! Banks will charge a higher interest to borrowers than what they pay to savers. This is how they make an income. E.g Joe saves 100 with BNZ and earns 5% interest in return for saving. BNZ then loans some of this money out but charges 10% for loans.
Open Economy Not all goods available in NZ are produced in NZ. – Imports = Goods made overseas but sold in NZ Not all goods produced in NZ are sold here. – Exports = Goods made in NZ but sold overseas Exports and Imports are real flows. They are actual goods and services being traded internationally. Producers Overseas Sector Imports Exports
Money Flows – Export receipts= payments from overseas firms to NZ firms for the goods and services exported overseas. – Import Payments = NZ producers payments to overseas firms for the goods and services they have imported. – Remember export receipts are coming into NZ – Import payments are leaving NZ Producers Overseas Sector Imports Exports Export Receipts Import Payments
An Open Economy a b c d f g Households Producers Financial Institutions Overseas Sector C (consumption) Y (Income) S (Savings) I (Investment) X (Export receipts) M (Import payments)
Role of the Government The government collects taxes – PAYE (pay as you earn) Income tax – GST (goods and services tax) 15% tax on any good or service you consume. – Company Tax – Taxes paid by producers to the government Transfers – Subsidies that go to producers – Social Welfare- (Sickness benefit, superannuation, unemployment benefit) this flow goes straight to households. Government Spending – Providing goods and services. (Schools, hospitals and the police force) – Payment for goods and services
Role of the Government a b c d f g Households Producers Financial Institutions Overseas Sector C (consumption) Y (Income) S (Savings) I (Investment) X (Export receipts) M (Import payments) Government a b c tr (transfers) T (taxes) G (Government Spending)
The Circular Flow Model a b c d e f h g i C (consumption) Households Producer Financial Institutions Overseas Sector Y (Income) S (Savings) I (Investment) X (Export receipts) M (Import payments) T (taxes) tr (transfers) G (Government Spending) Government
The Circular Flow model Y= Incomes including rent wages interest and profit C= Consumption spending- the payment for goods and services S= Savings – income not spent on consumption this is a withdrawal from the economy I= Investment spending-purchase of capital goods. This is an injection into the economy X= Export receipts- Money received for exports sold M= Import payments- Payments made for imports purchased G= Government Spending- on collective goods T= Taxes the government collects from households and firms. These are used to fund G and Tr. Tr= Transfer money from one group to another, because of this transfer payments are not true expenditure.
Withdrawals and Injections Withdrawal = A money flow that leaves the circular flow – I= Investment spending-purchase of capital goods. This is an injection into the economy – X= Export receipts- Money received for exports sold – G= Government Spending- on collective goods Injection= Flows of money into the circular flow model – S= Savings – income not spent on consumption this is a withdrawal from the economy – M= Import payments- Payments made for imports purchased – T= Taxes the government collects from households and firms. These are used to fund G and Tr.
Money and Real Flows - Notes Money Flow – are the payments made for goods purchased or the services being provided. – E.g the payment of wages in return for the use of labour Real Flow – are the movements of actual goods and services between different sectors of the economy – E.g. the use of labour by a producer