![]() Four SectorsThe circular flow model illustrates the interaction among the four macroeconomic sectors-household, business, government, and foreign. The income diverting away from consumption and to saving or taxes does not disappear, but is used to finance investment by business sector and purchases by the government sector. In particular, household income can be used for consumption, saving, or taxes. The prime conclusion of the circular flow model is that the overall volume of the circular flow is largely unaffected by the path taken. ![]() However, more realistic circular flow models include saving, investment, and investment borrowing enabled by the financial markets taxes and expenditures of the government sector and imports and exports of the foreign sector. ![]() The basic model illustrates the interaction between the household and business sectors through the product and resource markets. Diffe rent versions of the model sequentially combined the four sectors-household, business, government, and foreign-and the three markets-product, resource, and financial-into increasingly more comprehensive representations of the economy. The circular flow model is a fundamental representation of macroeconomic activity among the major players in the economy-consumers, producers, government, and the rest of the world. The circular flow model provides a easy way of getting the "big picture" and of seeing how the key parts of the macroeconomy fit together. In particular, the circular flow is a model of the continuous production and consumption interaction among the four major sectors of the macroeconomy-household, business, government, and foreign-using the three macroeconomic markets-product, resource, and financial. The assets on one side are equal to the liabilities and net worth on the other.ĬIRCULAR FLOW: A model of the continuous movement of production, income, and the services of scarce resources that flow between producers and consumers. ![]() By definition, a balance sheet must balance. Net worth is the difference between the two and what is claimed by or owed to the owners of the bank. AmosWEB means Economics with a Touch of Whimsy!īANK BALANCE SHEET: A record of the assets, liabilities, and net worth of a bank at a given point in time. ![]()
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