ECO 1102 Chapter Notes - Chapter 5: Government Spending, Indirect Tax, Black Market
4 May 2018
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Chapter 5: Measuring A Nation’s Income
Circular Flow Model:
• Gives the structure of the macroeconmy
• Refer to textbook for simple version.
• why do we bother studying the circular flow model to begin with ; It will
give an idea of the structure of the macreconomy.
Definitions of Circular Flow Model and Major Ideas:
• Flow quantitity is an amount per unit of time; current of water passing
through
• Stock is an amount observed at a point in time; volume of water in the
tank
Flow quantity; time frame vs stock quantity has a snapshot
• Relation of flow and stock
• T-value of stock at a time (t-1+value of inflow-value of outflow)
• Leakages and injections are both flow quantities.
• Dealing with flow quantities; including investment, export, and governing
spending known as injection.
• Where as; leakage is any withdrawal from the circular flow ; taxes,
import, savings
Basic Concept:
• Connected to eachother; flows of expenditure and incomes circulating
through the markets that comprise the macroeonomy; )Blood circulating
through the human body. )
• Two concepts; Factor markets(inputs) and goods and services markets
(outputs)
• Actors houseolds vs producers(firms, business)
• Two types of economic activity (flows)
Diagram Explanation:
green arrow denote financial flows
red arrows denote the Real flows of ether factors being rendered goods and
services being exchanged.
Bottom; factor market (households who are the sellers and earn income; firms are
buyers and sellers).
Top; goods and service market; households are the buyers and spend.
Therefore firms are the sellers and earn income
• There are two types of flows expenditure and income flow variable.
• Firms in the factor markets
Key Points:
• Expenditure for one actor is income for another actor within each of these
two markets. Every dollar circulating in this model; as well as in the real
world has a split personality a dual identity. One persons earning is
necessarily is expanded by one or more other economic actors.
• Aggregate expenditure=aggregate income ; it is identity not an equilibrium.
Complication:
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Document Summary
Definitions of circular flow model and major ideas: flow quantitity is an amount per unit of time; current of water passing through, stock is an amount observed at a point in time; volume of water in the tank. Red arrows denote the real flows of ether factors being rendered goods and services being exchanged. Bottom; factor market (households who are the sellers and earn income; firms are buyers and sellers). Top; goods and service market; households are the buyers and spend. Therefore firms are the sellers and earn income: there are two types of flows expenditure and income flow variable, firms in the factor markets. Key points: expenditure for one actor is income for another actor within each of these two markets. Every dollar circulating in this model; as well as in the real world has a split personality a dual identity.
