We’ll be looking at a model of an economy This is an economic model that attempts to explain the real world. 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. Looking at a model of an economy 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. CLICK real train CLICK simple toy (start with the basics) CLICK more detailed and complex CLICK getting closer to reality, but still a simplification.

How does our economy work? First, the productive sector employs resources (such as labour) and uses them to create goods and services (output). the Firm (CLICK) “How does our economy work?” (CLICK) “First, the productive…” animation begins (workers) (CLICK) “and uses them…” (cars flow out) (CLICK)…

How does our economy work? Households consume these goods and services and provide Firms with the resources (such as labour) that they require. Households “Households consume…” (cars flow in) (CLICK) “and provide…” (workers flow out) (CLICK) …

How does our economy work? The activities of Households and Firms are linked. Households provide resources to Firms and earn income (such as salaries and wages) in exchange. Firms Households Firms produce goods and services which they sell to Households. “The activities of Households…” (CLICK) “Households provide resources…” (workers go) (CLICK) “and earn income…” (dollars return) (CLICK) “Firms produce…” (cars flow) “which they sell…” (dollars flow) (CLICK)…

How does our economy work? Incomes Resources Households provide resources to Firms and earn income (such as salaries and wages) in exchange. Firms Households Consumer Spending Goods & Services 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 (CLICK) “Resources and goods…” (workers and cars flow, then turn into arrows) (CLICK) “There are called Real Flows…” (CLICK) “Money Flows go…” (dollars flow then turn into arrows) (CLICK)… Money Flows go in the other direction

How does our economy work? It is made up of Real Flows and Money Flows. This is called the Circular Flow Model. Firms Households (Sectors move and flows start) “This is called the Circular Flow Model” (CLICK) “It is made up of…” (arrows reveal) (CLICK)…

The Circular Flow Model This is called the Circular Flow Model. It is made up of Real Flows and Money Flows. Income Resources Firms Households Labels come up (CLICK) “This is an economic model… …what is important” (CLICK) TASK (click to go to slide 17) Goods and Services Consumer Spending Task

The Circular Flow Model Expanding the Model 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. Income Households Firms Resources Goods and Services Consumer Spending (CLICK) “Expanding the Model” “ Households and Firms…” (real flows fade) We know they are still there because we have the money flows Income and Consumer Spending. If the real flows didn’t occur, then there would be no money flow. (CLICK)…

The Circular Flow Model savings So, there are two new money flows, and investment. 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. Income Consumer Spending Households Firms Investment Savings “The Financial Sector…” (sector fades in) “Households save…” (money flows) (CLICK) “Firms go to banks…” (money flows) “This is called investment” (CLICK) “So there are two new flows” “Savings” (labelled arrow fades in) “Investment” (labelled arrow fades in) (CLICK) TASK (click to go to slide 18) Finance Sector Task

The Circular Flow Model 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...) Income Consumer Spending Households Firms Taxes Taxes Investment Savings “The Government…” (sector fades in) CLICK to change pic (CLICK) “It collects…” (household taxes flow) (CLICK) “as well as…” (flow of taxes from firms) (CLICK) to move on to next slide Finance Sector

The Circular Flow Model This taxation revenue is then used to make transfer payments such as: social welfare benefits to NZ’s most vulnerable citizens, subsidies to business for merit goods such as medicines, other goods and services such as police, hospitals, roading... Income Consumer Spending Households Firms Taxes Taxes Transfers Subsidies Investment Savings Government Spending “This taxation revenue…” (sector fades in) (CLICK) “social welfare…” (transfers flow) (CLICK) “subsidies…” (subsidies flow) (CLICK) “other goods...” (government spending flow) (CLICK) TASK (click to go to slide 19) Finance Sector Task

The Circular Flow Model earning export receipts. Another sector to add is the Overseas Sector. Firms sell their products to foreign buyers, is matched by a money flow, export receipts. A real flow of exports Savings Investment Finance Sector Income Consumer Spending Households Firms Taxes Taxes Transfers Subsidies Exports Government Spending Export Receipts “Another sector to add is the Overseas Sector” (CLICK) “Firms sell their products…” (cars flow) “earning export receipts” (dollars flow) (CLICK) “A real flow of exports...” (labelled arrows fade in) (CLICK)…

The Circular Flow Model Firms also import goods and services to use or sell. The real flow of imports is matched by the money flow, import payments. Savings Investment Finance Sector Income Consumer Spending Households Firms Import Payments Taxes Taxes Transfers Subsidies Exports Imports Government Spending Export Receipts (Export flow fades) “Firms also import…” (goods and dollars flow) (CLICK) “The real flow…” (labelled arrows fade in) (CLICK)…

The Circular Flow Model Our new model, showing money flows only, now looks like this. Income Finance Sector Households Firms Import Payments Taxes Taxes Transfers Subsidies Consumer Spending Investment Savings Imports Government Spending Export Receipts (Imports flow fades) “Our new model…” (dollars start to flow) (CLICK)…

The Circular Flow Model Our new model, showing money flows only, now looks like this. Income Finance Sector Households Firms Import Payments Taxes Taxes Task Transfers Subsidies Consumer Spending Investment Savings Government Spending Export Receipts (Task arrives) (CLICK) to go to slide20

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In which flow or sector would you classify the following? Households Firms Income Resources Goods and Services Consumer Spending In which flow or sector would you classify the following? A yacht Goods/Services The buyer of a yacht Households Money spent on a yacht Consumer Spending Timber for the decking Resources A yacht manufacturer Firms (CLICK) “In which flow or sector…” task (CLICK) to bring up list (CLICK) to reveal answers BACK (click to return to slide7) A boat builder Resources Wages paid to a boat builder Income ANSWERS Payment for timber Income Profits from the sale of yachts Income Back

Savings can be defined as income not spent Investment Finance Income Consumer Spending Households Firms Savings can be defined as income not spent Investment can be defined as the creation of capital goods Using these definitions, classify the following into one of the money flows: Lee deposits money in the bank Savings Lee buys a van Consumer Spending LBJ Ltd buys a van Investment Lee buys shares in LBJ Savings “Savings can be defined…” “Investment can be defined…” “Using these definitions…” task Items will come up (CLICK) to reveal answers BACK (click to return to slide10) LBJ uses a share float to expand their factory Investment Lee receives his salary Income ANSWERS Lee gets a dividend on his shares Income LBJ researches a new product Investment Back

Transfer Payments are a one-way payment with no exchange occuring. Savings Investment Finance Income Consumer Spending Households Firms Transfer Payments are a one-way payment with no exchange occuring. Taxes Taxes Transfers Subsidies Government spending only refers to spending on goods and services when an exchange of funds for commodities does occur. Govt Spending Government Spending or Subsidy or Tax or Transfer Payment? Unemployment benefit Transfer Payment Company taxes Tax (from firms) Free doctors visits for under 5s Subsidy “Savings can be defined…” “Investment can be defined…” “Using these definitions…” task Items will come up (CLICK) to reveal answers BACK (click to return to slide9) Road User Charges Tax (from firms) Working for Families payment Transfer Payment ANSWERS Purchase of new desks for classrooms Government Spending Back

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

JH Whittaker and Sons Ltd Payment for imported cocoa beans 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 blank Circular Flow comes up The Circular Flow model may be drawn in a number of different ways and different lay-outs. (CLICK) for task Give time for students to copy (CLICK) for list Students could write answers onto board (give items a number?)