1. Learning Objectives: Measuring the Economy LO1: Understand the circular flow of national income LO2: Explain the concept of equilibrium and why national income can rise and fall LO3: Understand the components of GDP accounting and be aware of some of the problems in determining official statistics CHAPTER 3 3-1© 2012 McGraw-Hill Ryerson Limited

2. Circular Flow of Income 3-2© 2012 McGraw-Hill Ryerson Limited LO1 Simplified economy with two sectors Businesses Households

3. Circular Flow of Income 3-3© 2012 McGraw-Hill Ryerson Limited LO1 Businesses sell goods & services to households Households provide factors of production to businesses Businesses Households Goods and services Factors of production

4. Circular Flow of Income 3-4© 2012 McGraw-Hill Ryerson Limited LO1 Households pay for goods and services Businesses pay for factors of production Businesses Households Goods and services Factors of production $ Consumption spending $ Rent, wages, interest, profit

5. Consumption Household spending on goods and services Product Market The market for consumer goods and services Factor Market The market for factors of production 3-5© 2012 McGraw-Hill Ryerson Limited LO1 Circular Flow of Income

6. 3-6© 2012 McGraw-Hill Ryerson Limited LO1 Businesses Households Goods and services Factors of production $ Consumption spending $ Rent, wages, interest, profit Product Market Factor Market

7. Circular Flow of Income 3-7© 2012 McGraw-Hill Ryerson Limited LO1 Businesses Households Goods and services Factors of production $ Consumption spending $ Rent, wages, interest, profit National Income: sum of all spending OR sum of all incomes earned

8. Stock of Money Quantity of money at a specific point in time Flow of Income Amount of income over a given period of time 3-8© 2012 McGraw-Hill Ryerson Limited LO1 Stock vs Flow

9. Leakages Leakage – Income received within the circular flow that does not flow directly back 1.Savings 2.Taxes less transfer payments - transfer payment: one-way transaction where payment is made but no good or service flows back 3.Imports 3-9© 2012 McGraw-Hill Ryerson Limited LO1

10. Injections Injection – Any spending flow that is not dependent on the current level of income 1.Investment (on capital goods) 2.Government spending 3.Exports 3-10© 2012 McGraw-Hill Ryerson Limited LO1

11. Leakages and Injections Leakages 1.Savings 2.Taxes 3.Imports 3-11© 2012 McGraw-Hill Ryerson Limited LO1 Injections 1.Investment 2.Govt spending 3.Exports

12. Saving and Investment Saving is that portion of income that is not spent on consumption Important source of loanable funds The amount of savings in the economy depends primarily on the level of incomes 3-12© 2012 McGraw-Hill Ryerson Limited LO1 Y = C + S S = Y - C

13. Circular Flow of Income 3-13© 2012 McGraw-Hill Ryerson Limited LO1 Businesses Households Goods and services Factors of production $ Consumption spending $ Rent, wages, interest, profit Financial Intermediaries Saving Investment

14. Imports and Exports When goods & services are imported, Canadian payments leak out to another country – imports are a leakage When goods & services are exported, foreign payments are injected into our economy 3-14© 2012 McGraw-Hill Ryerson Limited LO1

15. 3-15© 2012 McGraw-Hill Ryerson Limited LO1 Businesses Households Goods and services Factors of production $ Consumption spending $ Rent, wages, interest, profit Financial Intermediaries Saving Investment Foreign Sector Foreign Sector $ Payment for Imports $ Payment for Exports

16. Taxes and Government Spending Governments collect taxes from households and businesses – which leak out of the economy Tax revenues may be used for government spending programs – which are injections 3-16© 2012 McGraw-Hill Ryerson Limited LO1

17. 3-17© 2012 McGraw-Hill Ryerson Limited LO1 Businesses Households Goods and services Factors of production $ Consumption spending $ Rent, wages, interest, profit Financial Intermediaries Saving Investment Foreign Sector Foreign Sector $ Payment for Imports $ Payment for Exports Govt T T TP G