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Circular Flow Model : : Lets Simplify It

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No one has a private property right to a public good. ... In the U.S., the Federal Reserve Board ('the Fed') is responsible for this. Fiscal Policy ... – PowerPoint PPT presentation

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Title: Circular Flow Model : : Lets Simplify It


1
Circular Flow Model Lets Simplify It
2
Private Sector Circular Flow
3
Private and Public Sectors
  • Private sector households, businesses, the
    international sector.
  • Household spending ?consumption.
  • Business spending on capital goods and
    inventories ? investment.
  • Sales of goods and services to foreigners
    ?exports.
  • Purchases from foreigners ? imports.
  • Public sector government activities.

4
Income Distribution in Market Economy
  • What you own ? What you get
  • Firms pay the factors of production according to
    their marginal products
  • Workers get wages equal to the marginal product
    of labor.
  • Capitalists get interest equal to the marginal
    product of capital.
  • Landlords get rents equal to the marginal product
    of land.
  • Entrepreneurs get profits equal to the excess of
    revenues over costs (payments to other factors).

5
Household Spending and Income
6
Private Sector Circular Flow Y Income earned
from contributing to production Wages
Interest Rents Profits Receipts of Firms Y
Receipts C I NX Hshld Spending
Saving C S C I NX ? S
I NX
7
Direction of U.S. Trade
8
Open Economy Circular Flow
9
The Governments Role
Correct for
  • Imperfect Information
  • Externalities
  • Public Goods
  • Lack of Competition
  • Business Cycles

10
Public Goods
  • Consumption by one person does not diminish the
    quantity or quality available to others.
  • Public goods can be jointly consumed
  • Public goods are non-excludable
  • No one has a private property right to a public
    good.
  • Everybody has incentive to be a free rider
  • When everyone free rides, too little (or none) is
    produced.

11
Macroeconomic Policy Macro Stability A Public
Good
  • Monetary Policy
  • Policies that influence money and credit (money
    supply and interest rates).
  • In the U.S., the Federal Reserve Board (the
    Fed) is responsible for this.
  • Fiscal Policy
  • Policies that control government spending and
    taxation.
  • In the U.S. federal government, Congress enacts
    these policies and the President signs them into
    law.

12
Federal, State, and Local Government Expenditures
for Goods and Services
13
U.S. Federal Budget Deficits
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