1. Five Sector Circular Flow of Income Model Why does economics matter? http://www.miniature-earth.com/me_english.htm Examine the economic cycles Explore how income flows impact on the economic cycle http://tutor2u.net/economics/presentations/aseco nomics/macro/EconomicCycle/default.htmlhttp://tutor2u.net/economics/presentations/aseco nomics/macro/EconomicCycle/default.html Update wiki – glossary of terms

2. Businesses Individuals In a simple economy economic activity occurs between individuals and businesses Identify the income flows between the two sectors in this simple economy. Income rewards expenditure

3. Businesses Individuals Governments Income rewards expenditure taxationexpenditure As economists, we are aware that another sector exists. Any idea what this might be??? So, what are the income flows between individuals and businesses and the Government? But wait….there’s more!!!

4. Financial Institutions Businesses Individuals Governments Income rewards expenditure savings taxationexpenditure investment Financial institutions are another sector within our economy. Identify the income flows between individuals and businesses and financial institutions.

5. Financial Institutions Businesses Individuals Governments Income rewards expenditure savings taxationexpenditure investment Anything else?????We are not alone!!! International Flows importsexports Identify the income flows between the two sectors and the international economy

6. Do you remember how many sectors there were? Hence, why this model is commonly referred to as The Five Sector Circular Flow of Income model Financial Institutions BusinessesIndividuals Governments International Flows

7. Savings, taxation and spending on imports remove money from the economy. These are referred to as leakages. Leakages reduce the amount of money in our economy.

8. Investment, expenditure and exports add money to the economy. These are referred to as injections. Injections increase the amount of money in our economy.

9. Equilibrium occurs in the circular flow of income when: Leakages = Injections

10. Equilibrium occurs in the circular flow of income when: Leakages = Injections What are the leakages? Savings (S) Taxation (T) Imports (M) What are the injections? Investment (I) Expenditure (G) Exports (X)

11. Equilibrium occurs in the circular flow of income when: Leakages = Injections Therefore, we can state that Savings + Tax + Imports = Investment + Expenditure + Exports S + T + M = I + G + X

12. Insert these figures into the formula to determine where the economy is in the economic cycle. Savings (S) $20 Taxation (T) $50 Imports (M) $60 Investment (I) $40 Expenditure (G) $80 Exports (X) $10 S + T + M = I + G + X What would be the impact of an increase in expenditure? (similar to Kevin Rudd’s $42bn stimulus package announced on 3 Feb)

13. When total leakages exceed injections, an economic downturn will occur. When total injections exceed leakages, an economic upturn will occur.

14. Homework Glossary of terms on the wiki Prelim Topic 1 handout – by Monday 16 Feb

15. Financial Institutions Businesses Individuals Governments International Flows Income rewards expenditure savings taxation importsexports expenditure investment LeakagesInjections