The flow of goods and services in a market economy

FLOW OF GOODS AND SERVICES IN THE ECONOMYAN OPEN ECONOMY

B2 B1

FINANCIAL MARKETS

A2 A1

FIRMS HOUSEHOLDS

FA CTOR MARKET

PRODUCT MARKET

D S

DS

P

Q

P

Q

S

T

IM

G

I

FINANCI

X

I

S

S

D S

Product Market

Factors Market

CONSUMERSPRODUCERS

P

Q

P

Q

T

D

IM

GX

I

The playersThe 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

CONSUMERSPRODUCERS

The marketsIN 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

D S

Product Market

Factors Market

CONSUMERSPRODUCERS

P

Q

P

Q

D

The flows

S

D S

Product Market

Factors Market

CONSUMERSPRODUCERS

P

Q

P

Q

DB1B2

A2A1

A1 and A2 flows are called GDP Expenditures based flows

Consumers demand and purchase final goods and services from Producers on an open market. Their expenditures.

They provide money and receive final goods The amount of goods and services that they can

purchase creates their standard of living Producers supply and sell final goods and

services to Consumers on an open market. They receive money and provide goods and

services The money they receive becomes their revenues

S

D S

Product Market

Factors Market

CONSUMERSPRODUCERS

P

Q

P

Q

DB1B2

A2A1

B1 and B2 flows are called GDP Income based flows Firms (Producers) demand and purchase Factors of

Production goods and services from Households.(land, labour, capital, entre.)

They provide money and receive the factors of production needed to produce goods & services

The amount and the price of factors of production will determine the final price of the item and the number of items produced

Households (Consumers ) supply and sell the factors of production needed to produce items.

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

D S

Product Market

Factors Market

CONSUMERSPRODUCERS

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

D S

Product Market

Factors Market

CONSUMERSPRODUCERS

P

Q

P

Q

D

GX

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

D S

Product Market

Factors Market

CONSUMERSPRODUCERS

P

Q

P

Q

T

D

IM

GX

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

D S

Product Market

Factors Market

CONSUMERSPRODUCERS

P

Q

P

Q

D

The REAL flows and NOMINAL flowsTHE NOMINAL FLOW:

THIS IS THE DOLLAR VALUE FLOW OF GOODS AND SERVICES THROUGHOUT THE ECONOMY

EXAMPLE: THE $ VALUE OF 1 CAR PURCHASED = $20000

1 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

D S

Product Market

Factors Market

CONSUMERSPRODUCERS

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 60+15+20+5=$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 60+15+20+5 = EXPENDITURES $1

S

D S

Product Market

Factors Market

CONSUMERSPRODUCERS

P

Q

P

Q

D

INCOME

EXPENDITURES

Economic growth within this modelLeakages 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 economyc. 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 economyc. 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 economyc. if I=S= no change which is neutral for the economy

Economic growth within this model …mathematical examplesC=consumer expendituresStarting economy: Y1 = C + LeakagesEnding economy: Y2 = C + InjectionsYearly Economic change = Y2 - Y1Yearly % 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

D S

Product Market

Factors Market

CONSUMERSPRODUCERS

P

Q

P

Q

T

D

IM

GX

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