1. THE CIRCULAR FLOW OF ECONOMIC ACTIVITY

2. Circular Flow
The circular-flow diagram is a model that represents the continual movement of money and goods in the economy
It is a simplification of how money and goods flow from households to business and back again

3. Circular Flow Models
Models can be simple (two-sector) to complex (five-sector)
All models show that the economy relies on continuous movement of goods and money to maintain strong economy

4. circular flow concepts
Product Market – where goods and services are exchanged
Factor Market – where the factors of production are exchanged
Households – suppliers of the factors of production
& demanders of goods and services
2-SECTOR
3-SECTOR
4-SECTOR
Businesses / Firms – suppliers of goods and services
& demanders of the factors of
production
Government – providers of public goods and services &
demanders of both private goods and
services and the factors of production
Foreign – suppliers of imports & demanders of
exports

5. Two-sector model
In this model the business sector does not buy all the economic resources directly from the households; nor do the households buy goods and services directly from business sector.
Both types of transactions are carried through the markets (the resource, or factor, market and the product market).

7. Limitations to Basic Model
This basic two-sector model is built on the assumption that spending creates income.
But, do households always spend what they earn?
And, do businesses always spend what they earn?

9. Monetary Policy
According to classical theories of economics, the capital market always acts in a manner that will make saving equal to investments automatically through the mechanism of the rate of interest.
But modern economists believe that there is no automatic capital market mechanism making S = I. Some outside force or action or mechanism must be geared into action to make S = I.
This outside action, force or mechanism is monetary policy, which can stimulate or retard investment spending.

10. Two-sector Model
What are the limitations of viewing the economy as a two-sector model?
What sectors are missing?
What variables are not taken into consideration?

11. Add the Government Sector
When we give money to governments (Central, State, Local) in the form of taxes, our ability to spend is reduced but the government can offset the effect of this leakage through taxes by spending more on the purchase of goods and services called injection. This act on the part of the government to levy taxes and to spend more is called fiscal action.

12. Three-sector model LEAKAGE
In three-sector models, flows from household sector and producing sector to government sector are in the form of taxes.
INJECTION
The income received from the government sector flows to producing and household sectors in the form of payments for government purchases of goods and services as well as payment of subsides and transfer (benefits) payments.

14. Role of Fiscal Policy
. If I < S, then government should compensate the economy by spending more than it taxes: FISCAL POLICY.
It is, therefore, clear that the monetary policy and the fiscal policy are necessary instruments of maintaining circular flows in the economy—in case it is temporarily disrupted by leakages in the form of savings or taxes or imports.

15. Three-sector Model
What are the limitations of viewing the economy as a three-sector model?
What sector is missing?
What variables are not taken into consideration?

17. The Addition of Trade
When the foreign sector is added in our four-sector model we treat imports as leakages and exports as injections.
These flows pass through a sector called ‘balance of payments’ sector—which is influenced by various types of foreign trade policies (say, like free trade or protection).
The equilibrium condition for maintaining the circular flow would still be that total leakage must equal total injections.

18. Four-sector Model
Technically speaking, so long as lending is equal to the borrowing i.e. leakage is equal to injections, the circular flow will continue indefinitely.
However this job is done by financial institutions in the economy, and is complicated by competing economic philosophies.

19. When the Circular Flow Falters…
What to do when the economy isn’t circular and doesn’t flow?
Areas of Concern with the US economy today:
Income Inequality
Resource Allocation
Worker and Consumer Safety
Capital Market Accountability
Globalization

20. Income Inequality Issues to consider: Minimum wage Welfare programs
Tax rates
Racial inequality
Gender gap
Net neutrality
Health care
Affordable housing

22. Resource Allocation Carbon tax Imminent domain Water rights
Grazing rights
EPA regulations

23. SNACK BREAK!
PLEASE COME UP AND HELP YOURSELF TO AS MUCH AS YOU WANT

24. Worker and Consumer Safety
FDA regulations
OSHA regulations
Family leave/sick leave
Union rights

26. Capital Market Accountability
Banking regulations
Stock market regulations
Mergers and acquisitions regulations

28. Globalization Immigration policy Climate treaties Trade agreements
Outsourcing
Environmental impacts
Human rights issues

29. Transnational Capital Auction: A game of Survival
You are leaders of a poor country. Each of your countries was either colonized by European countries or dominated by them economically or militarily. You need to attract foreign investment (“Capital”) from transnational corporations for many different reasons. Of course not all of your people are poor. Many, including you, are quite wealthy. But your wealth depends largely on making deals with corporations that come to your country…