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This is an economic model that attempts to explain the real world. It simplifies all that goes on in a real economy and just focuses on what is considered.

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Presentation on theme: "This is an economic model that attempts to explain the real world. It simplifies all that goes on in a real economy and just focuses on what is considered."— Presentation transcript:

1 This is an economic model that attempts to explain the real world. It simplifies all that goes on in a real economy and just focuses on what is considered important. We start with something very simple, and gradually build a more detailed and complex model. So, while we get closer to reality, it is still only a model. This is an economic model that attempts to explain the real world. It simplifies all that goes on in a real economy and just focuses on what is considered important. Well be looking at a model of an economy This is an economic model that attempts to explain the real world.

2 the Firm First, the productive sector employs resources (such as labour) and uses them to create goods and services (output).

3 Households Households consume these goods and services and provide Firms with the resources (such as labour) that they require.

4 Households provide resources to Firms and earn income (such as salaries and wages) in exchange. Firms produce goods and services which they sell to Households. The activities of Households and Firms are linked. Households Firms

5 Households provide resources to Firms and earn income (such as salaries and wages) in exchange. Firms produce goods and services which they sell to Households. Resources and goods and services flow one way These are called Real Flows because they are physical items Money Flows go in the other direction Households Firms

6 This is called the Circular Flow Model. Households It is made up of Real Flows and Money Flows. Firms

7 Households Firms This is called the Circular Flow Model.It is made up of Real Flows and Money Flows. Income Resources Goods and Services Consumer Spending Task

8 Income Resources Goods and Services Households and Firms are not the only sectors in the economy. Before expanding the model, we will simplify it by only using money flows from now on. Expanding the Model Consumer Spending Households Firms

9 The Financial Sector includes banks, insurance companies and other financial institutions. Households save any income not spent with this sector Firms go to banks to borrow funds for expansion: new factories, new machines or research and development. This is called investment. So, there are two new money flows,savingsand investment. Savings Investment Income Consumer Spending Households Firms Finance Sector Task

10 The Government in NZ accounts for over 35% of all economic activity. It collects direct tax from households (PAYE) as well as indirect taxes from firms (GST, excise taxes...) Savings Investment Income Consumer Spending Households Firms Finance Sector Taxes

11 This taxation revenue is then used to make transfer payments such as: social welfare benefits to NZs most vulnerable citizens, subsidies to business for merit goods such as medicines, Savings Investment Income Consumer Spending Households Firms Finance Sector Task Taxes other goods and services such as police, hospitals, roading... Government Spending Subsidies Transfers

12 Another sector to add is the Overseas Sector. Firms sell their products to foreign buyers, earning export receipts. A real flow of exportsis matched by a money flow, export receipts. Exports Export Receipts Savings Investment Finance Sector Income Consumer Spending Households Firms Taxes Government Spending Subsidies Transfers

13 Export Receipts Firms also import goods and services to use or sell. is matched by the money flow, import payments.The real flow of imports Exports Imports Import Payments Savings Investment Finance Sector Income Consumer Spending Households Firms Taxes Government Spending Subsidies Transfers

14 Import Payments Export Receipts Investment Savings Consumer Spending Income Our new model, showing money flows only, now looks like this. Imports Finance Sector Households Firms Taxes Government Spending Subsidies Transfers

15 Import Payments Investment Income Our new model, showing money flows only, now looks like this. Savings Consumer Spending Export Receipts Finance Sector Households Firms Taxes Government Spending Subsidies Transfers Task

16 End of slide show, click to exit

17 Households Firms Income Resources Goods and Services Consumer Spending In which flow or sector would you classify the following? Money spent on a yacht Timber for the decking A yacht manufacturer Payment for timber Profits from the sale of yachts A boat builder Wages paid to a boat builder Consumer Spending Resources Firms Resources Income The buyer of a yacht Households A yacht Goods/Services Back ANSWERS

18 Savings can be defined as income not spent Lee buys a van LBJ Ltd buys a van Lee buys shares in LBJ Lee gets a dividend on his shares LBJ researches a new product LBJ uses a share float to expand their factory Lee receives his salary Consumer Spending Investment Savings Investment Income Investment Lee deposits money in the bank Savings Back Savings Investment Finance Income Consumer Spending Households Firms Investment can be defined as the creation of capital goods Using these definitions, classify the following into one of the money flows: ANSWERS

19 Transfer Payments are a one-way payment with no exchange occuring. Company taxes Free doctors visits for under 5s Road User Charges Working for Families payment Tax (from firms) Subsidy Tax (from firms) Transfer Payment Unemployment benefit Back Savings Investment Finance Income Consumer Spending Households Firms Government spending only refers to spending on goods and services when an exchange of funds for commodities does occur. Taxes Govt Spending Subsidies Transfers Government Spending or Subsidy or Tax or Transfer Payment? Purchase of new desks for classrooms Government Spending ANSWERS

20 The Leeming Family Noel Leeming Appliances Noel Leeming goes to work F & P dish drawers are sold in Namibia F & P builds a new assembly line Leigh Leeming buys a new fridge Leighs new fridge is produced in Australia Household Firm Income Consumption Investment Export Receipts Import Payment Import Payments Export Receipts Investment Savings Consumer Spending Income Finance Sector Households Firms In which money flow or sector would you classify the following? Taxes Govt Spending Subsidies Transfers ANSWERS

21 savings Copy this chart, then label the flows and sectors using the list below: JH Whittaker and Sons Ltd Payment for imported cocoa beans Whittakers purchase a new grinder Chocolate lovers Westpac Bank Income from exported peanut slabs Ghana Sante Bar purchases Factory workers wages


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