2. The open economy circular flow model The markets National account aggregates and conversions The multiplier: – Definition of multiplier effect – explanation of the multiplier process aided with a – circular flow and examples

4. Households: owners of the factors of production. Households offer FOP to firmsFirms use FOP to produce goods and services Households receive income(rent, wages and salaries, interest and profit.) from firms in exchange for FOP. Households use this income to buys goods and services in the goods market.

5. Firms: use factors of production to produce good & services Firms buy FOP’s from households in exchange for income (rent, wages and salaries, interest & profit).

6. Government: national, provincial and local Gov. supplies goods/services to households and also taxes households and firms. Foreign sector: countries in the rest of the world. Important for imports and exports

9. Real flows – flows of physical things. Money flows – aka nominal flows consist of the flow of money.

10. Leakages: factors that cause a decline in the flow of spending, income and production. Savings (S), taxes (T) & imports (M). Decreases the flow of money and the total spending in the economy. Injections: factors that cause an increase in the flow of spending, income and production. Investment (I), government spending (G) & exports (X).

12. INCOME FLOW Rent, wages/salaries, interest and profits to households from firms. PRODUCTION FLOW Consists of consumer goods/services and capital goods. SPENDING FLOW Total spending undertaken by households (consumption) and firms (investment). TS = C + I (TS) = (TP) = (TI) Spending on goods and services (TS) = what is being produced (TP) = what is paid out as income (TI) to FOP used in production.

13. The total spending in the model is equal to: TS = C + I = 800 + 200 = 1 000 TS = TP = TI Y = 1 000 C = 800 Y = 1 000 S = Y – C = 1 000 – 800 = 200 S is a leakage I is an injection Equilibrium since S = I

15. From this three-sector circular flow we can see that… Demand for goods/services in our economy consists of C + I + G Flows of spending, production and income are equal. 2 leakages: savings (S) and taxation (T). 2 injections: investment spending (I) and government spending (G). In equilibrium leakages = injections (S + T = I + G)

16. TS = C + I + G = 900 + 200 + 100 = 1 200 TS = TP = TI Y = 1200 1 200 – 50 = 1 150 Yd = Y – T = 1 200 – 50 = 1 150 1 150 – 900 = 250 S = Yd – C = 1 150 – 900 = 250 Total leakages S + T = 250 + 50 = 300 Equilibrium since S + T = I + G Total injections I + G = 200 + 100 = 300

18. From this four-sector circular flow we can see that… Demand for goods/services in our economy consists of C + I + G + (X – M) Flows of spending, production and income are equal. 3 leakages: savings (S) and taxation (T) and imports (M). 3 injections: investment spending (I) and government spending (G) and exports (X). In equilibrium leakages = injections (S + T + M = I + G + X)

19. = 850 + 200 + 100 + (100 – 120) TS = C + I + G + (X – M) = 850 + 200 + 100 + (100 – 120) = 1 130 TS = TP = TI Y = 1 130 Yd = Y – T = 1 130 – 50 = 1 080 S = Yd – C = 1 080 – 850 = 230 Leakages = S + T + M = 230 + 50 + 120= 400 Injections = I + G + X = 200 + 100 + 100 = 400