Notes 5’’’’. A more complete circular flow model FirmsHouseholds Goods mkt. Factor mkt. 1.Our original, simple model Nominal (money) flows only.

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Presentation transcript:

Notes 5’’’’. A more complete circular flow model FirmsHouseholds Goods mkt. Factor mkt. 1.Our original, simple model Nominal (money) flows only

Notes 5’’’’. A more complete circular flow model FirmsHouseholds Goods mkt. Factor mkt. Government Foreign Sector 2.Let’s add the Government & Foreign Sectors

Notes 5’’’’. A more complete circular flow model FirmsHouseholds Goods mkt. Factor mkt. Loanable Funds mkt. Saving ( S ) Borrowing for investment Government Foreign Sector 3.Let households save & business firms borrow & invest Foreign Direct Investment

Notes 5’’’’. A more complete circular flow model FirmsHouseholds Goods mkt. Factor mkt. Loanable Funds mkt. Saving ( S ) Borrowing for investment Government Taxes ( T ) Borrowing to cover budget deficit* Foreign Sector Foreign Direct Investment * Assumes a government budget deficit. In the event of a surplus, the flow is reversed. 4.The government taketh away...

Notes 5’’’’. A more complete circular flow model FirmsHouseholds Goods mkt. Factor mkt. Loanable Funds mkt. Saving ( S ) Borrowing for investment Government Taxes ( T ) Borrowing to cover budget deficit* Gov’t. Purchases ( G ) Foreign Sector Foreign Direct Investment Subsidies Transfer Payments Gov’t. Purchases ( G ) and giveth back * Assumes a government budget deficit. In the event of a surplus, the flow is reversed.

Notes 5’’’’. A more complete circular flow model FirmsHouseholds Goods mkt. Factor mkt. Loanable Funds mkt. Saving ( S ) Borrowing for investment Government Taxes ( T ) Borrowing to cover budget deficit* Gov’t. Purchases ( G ) Foreign Sector Foreign Direct Investment Subsidies Transfer Payments Gov’t. Purchases ( G ) Exports ( X ) Imports ( M ) 6.Foreign trade... * Assumes a government budget deficit. In the event of a surplus, the flow is reversed.

Notes 5’’’’. A more complete circular flow model FirmsHouseholds Goods mkt. Factor mkt. Loanable Funds mkt. Saving ( S ) Borrowing for investment Government Taxes ( T ) Borrowing to cover budget deficit* Gov’t. Purchases ( G ) Foreign Sector Foreign Direct Investment Subsidies Transfer Payments Gov’t. Purchases ( G ) Borrowing from foreign sector* Exports ( X ) Imports ( M ) Investment * Assumes government budget deficits and trade deficits. In the event of surpluses, the flows are reversed and capital flows complete the picture

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