The flow of goods and services in a market economy

S S DS Product Market Factors Market CONSUMERS PRODUCERS P Q P Q T D IM G X I

The players THE ECONOMY CAN BE DIVIDED BETWEEN CONSUMERS AND PRODUCERS 1. CONSUMERS OR HOUSEHOLDS THIS IS THE SECTOR OF THE ECONOMY THAT PURCHASES FINISHED GOODS AND SERVICES AND PROVIDE FACTORS OF PRODUCTION TO THE ECONOMY 2. PRODUCERS OR FIRMS THIS IS THE SECTOR OF THE ECONOMY THAT PROVIDES FINISHED GOODS AND SERVICES AND PURCHASES FACTORS OF PRODUCTION TO THE ECONOMY

CONSUMERS PRODUCERS

The markets IN CANADA FOR THE MOST PART THE MARKET PLACE DETERMINES THE PRICE AND THE QUANTITY OF GOODS AND SERVICES PRODUCED… AS WELL AS THE PRICE AND QUANTITY OF FACTORS OF PRODUCTION THE FREE INTERACTION BETWEEN THE SECTOR OF THE ECONOMY THAT DEMANDS AND THE SECTOR OF THE ECONOMY THAT SUPPLIES CREATES MARKET PRICES THAT SATISFIES BOTH DEMAND AND SUPPLY THERE ARE TWO MARKETS: THE MARKET FOR THE FACTORS OF PRODUCTION AN DTHE MARKET FOR GOODS AND SERVICES

S DS Product Market Factors Market CONSUMERS PRODUCERS P Q P Q D

The flows

S DS Product Market Factors Market CONSUMERS PRODUCERS P Q P Q D B1 B2 A2 A1

n A1 and A2 flows are called GDP Expenditures based flows n Consumers demand and purchase final goods and services from Producers on an open market. Their expenditures. n They provide money and receive final goods n The amount of goods and services that they can purchase creates their standard of living n Producers supply and sell final goods and services to Consumers on an open market. n They receive money and provide goods and services n The money they receive becomes their revenues

S DS Product Market Factors Market CONSUMERS PRODUCERS P Q P Q D B1 B2 A2 A1

n B1 and B2 flows are called GDP Income based flows n Firms (Producers) demand and purchase Factors of Production goods and services from Households.(land, labour, capital, entre.) n They provide money and receive the factors of production needed to produce goods & services n The amount and the price of factors of production will determine the final price of the item and the number of items produced n Households (Consumers ) supply and sell the factors of production needed to produce items. n They receive money in return, which becomes their income.

The leakages THERE ARE THREE CATEGORIES OF LEAKAGES IMPORTS: MONEY THAT GOES OUT OF THE ECONOMY AND INTO THE ECONOMY OF ANOTHER COUNTRY SAVINGS : MONEY FROM INCOME THAT IS NOT SPENT BUT SAVED FOR FUTURE SPENDING TAXES : MONEY FROM INCOME THAT IS TAKEN AWAY BY THE GOVERNMENT TO BE USED HOWEVER THEY SEE FIT

S S DS Product Market Factors Market CONSUMERS PRODUCERS P Q P Q T D IM IMPORTS: MONEY THAT GOES OUT OF THE ECONOMY AND INTO THE ECONOMY OF ANOTHER COUNTRY SAVINGS: MONEY FROM INCOME THAT IS NOT SPENT BUT SAVED FOR FUTURE SPENDING TAXES: MONEY FROM INCOME THAT IS TAKEN AWAY BY THE GOVERNMENT TO BE USED HOWEVER THEY SEE FIT

The injections THERE ARE THREE CATEGORIES OF INJECTIONS GOVERNMENT SPENDING : GOVERNMENT EXPENDITURES, MONEY PUT BACK INTO THE ECONOMY (MOST OF IT COMES FROM TAXES) EXPORTS : MONEY PUT INTO THE CANADIAN ECONOMY BY FOREIGN CONSUMERS INVESTMENTS : MONEY PUT INTO THE ECONOMY BY THE BUSINESS COMMUNITY (MOST OF IT COMES FROM CONSUMER SAVINGS)

S DS Product Market Factors Market CONSUMERS PRODUCERS P Q P Q D G X I GOVERNMENT SPENDING: GOVERNMENT EXPENDITURES, MONEY PUT BACK INTO THE ECONOMY (MOST OF IT COMES FROM TAXES) EXPORTS: MONEY PUT INTO THE CANADIAN ECONOMY BY FOREIGN CONSUMERS INVESTMENTS: MONEY PUT INTO THE ECONOMY BY THE BUSINESS COMMUNITY (MOST OF IT COMES FROM CONSUMER SAVINGS)

The whole model

S S DS Product Market Factors Market CONSUMERS PRODUCERS P Q P Q T D IM G X I

The REAL flows and NOMINAL flows THE REAL FLOW: THIS IS THE ACTUAL FLOW OF GOODS AND SERVICES THROUGHOUT THE ECONOMY EXAMPLE: 1 MILLION CARS 100 HOURS OF ACCOUNTING SERVICES 2 TONS OF IRON ORE

The REAL flows and NOMINAL flows THE REAL FLOW: SINCE THESE ARE THE ACTUAL GOODS AND SERVICES THEY OFFER A MORE ACCURATE COUNT OF THE PRODUCTION OF THE ECONOMY

S DS Product Market Factors Market CONSUMERS PRODUCERS P Q P Q D

The REAL flows and NOMINAL flows THE NOMINAL FLOW: THIS IS THE DOLLAR VALUE FLOW OF GOODS AND SERVICES THROUGHOUT THE ECONOMY EXAMPLE: THE $ VALUE OF 1 CAR PURCHASED = $ HOURS OF ACCOUNTING SERVICES=$100 2 TONS OF IRON ORE=$1000

The REAL flows and NOMINAL flows THE NOMINAL FLOW: SINCE THE MONEY FLOWS DEAL WITH PRICES IT MAY DISTORT THE ACTUAL PRODUCTION OF THE ECONOMY. IT INCLUDES INFLATION

S DS Product Market Factors Market CONSUMERS PRODUCERS P Q P Q D

The INCOME sector and the EXPENDITURES sector

The two sided economy within this model EVERY PRODUCT THAT IS MADE IN AN ECONOMY CAN BE SEEN IN TWO WAYS FOR THE INCOME INCLUDED IN IT OR FOR THE PRICE IT IS BEING SOLD AT

The two sided economy within this model EXAMPLE: A loaf of bread THAT SELLS FOR $1 IN THAT ONE DOLLAR LOAF, THERE ARE 4 CATEGORIES OF INCOME WAGES AND SALARIES = $.60, RENT = $.15, INTEREST= $.20, PROFIT=$.05 THEREFORE =$1 WHICH IS ALL THE INCOME INCLUDED IN IT

The two sided economy within this model OR THE EXPENDITURE EXTENDED TO PURCHASE THAT LOAF WHICH IS $1 THE TWO SIDES ALWAYS EQUAL: INCOME = EXPENDITURES $1

S DS Product Market Factors Market CONSUMERS PRODUCERS P Q P Q D INCOME EXPENDITURES

Economic growth within this model Leakages take money out of the economy while injections put money into the economy. For economic growth the economy needs more injections than leakages

Economic growth within this model Yearly government budgets: a. if G >T = deficit which is good for the short term economy b. if G<T = surplus which is bad for the short term economy c. if G=T= balanced budget which is neutral for the economy

Economic growth within this model Yearly trade balance: X - IM = surplus, a. if X >IM = surplus which is good for the short term economy b. if X<IM = deficit which is bad for the short term economy c. if X=IM= balanced budget which is neutral for the economy

Economic growth within this model Investments and savings: a. if I >S = net injections which is good for the short term economy b. if I<S = net leakages which is bad for the short term economy c. if I=S= no change which is neutral for the economy

Economic growth within this model …mathematical examples C=consumer expenditures Starting economy: Y1 = C + Leakages Ending economy: Y2 = C + Injections Yearly Economic change = Y2 - Y1 Yearly % Economic change = change / Y1 Example: C=300, G=20, I=30, IM=25, T=15, X=35, S=10

Economic growth within this model …mathematical examples What income did the country start with? What income did the country end with? What was the change? What was the % change? What was the government budget? What was the trade balance? What was the investment savings balance?

Economic growth within this model …mathematical examples What income did the country start with? 350 What income did the country end with? 385 What was the change? 35 What was the % change? 10% What was the government budget? T-G = 15-20= 5 deficit…good for economy What was the trade balance? X-IM=35-25=10 surplus…good for the economy What was the investment savings balance? I- S=30-10=20 surplus … good for the economy

S S DS Product Market Factors Market CONSUMERS PRODUCERS P Q P Q T D IM G X I

Economic growth within this model …mathematical examples PROBLEM 1 Example: C=500, G=40, I=20, IM=35, T=45, X=25, S=30

Economic growth within this model …mathematical examples What income did the country start with? What income did the country end with? What was the change? What was the % change? What was the government budget? What was the trade balance? What was the investment savings balance? Example: C=500, G=40, I=20, IM=35, T=45, X=25, S=30