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Transcript
The flow of goods and services in a market economy FLOW OF GOODS AND SERVICES IN THE ECONOMY AN OPEN ECONOMY FA CTOR MARKET I S D P S B2 B1 Q FIRMS T HOUSEHOLDS FINANCIAL MARKETS IM D A2 S A1 P G Q I PRODUCT MARKET X F I N A N C Factors Market D S I P Q S CONSUMERS PRODUCERS T Product Market D S IM P Q X G The 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 PRODUCERS CONSUMERS The markets IN 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 Factors Market D S P Q CONSUMERS PRODUCERS Product Market D S P Q The flows Factors Market D B2 S B1 P Q CONSUMERS PRODUCERS Product Market D S P A1 A2 Q 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 Factors Market D B2 S B1 P Q CONSUMERS PRODUCERS Product Market D S P A1 A2 Q 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 IMPORTS:MONEY MONEYFROM THATINCOME GOES OUT SAVINGS: THAT TAXES: MONEY FROM Factors Market INCOME THAT IS ISOF NOT SPENT BUT D SAVED S THE ECONOMY AND INTO TAKEN AWAYSPENDING BYP THE GOVERNMENT FOR FUTURE THE ECONOMY OF QANOTHER COUNTRY TO BE USED HOWEVER THEY SEE FIT S CONSUMERS PRODUCERS T Product Market D S P Q IM 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) GOVERNMENT EXPORTS: MONEY SPENDING: PUT INTO GOVERNMENT THE INVESTMENTS: MONEY PUT INTO THE Factors Market DMONEY EXPENDITURES, CANADIAN ECONOMY BY PUT FOREIGN BACK INTO ECONOMY BY THE SBUSINESS P THE CONSUMERS ECONOMY (MOST OF IT COMES COMMUNITY (MOST OF IT COMES Q FROM FROMTAXES) CONSUMER SAVINGS) CONSUMERS PRODUCERS Product Market D S P Q X I G The whole model Factors Market D I S P Q S CONSUMERS PRODUCERS T Product Market D S IM P Q X G 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 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 Factors Market D S P Q CONSUMERS PRODUCERS Product Market D S P Q The REAL flows and NOMINAL flows THE 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 Factors Market D S P Q CONSUMERS PRODUCERS Product Market D S P Q 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 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 INCOME Factors Market D S P Q PRODUCERS CONSUMERS Product Market D S P EXPENDITURES Q Economic growth within this model Leakages 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 economy c. 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 economy c. 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 economy c. if I=S= no change which is neutral for the economy Economic growth within this model …mathematical examples C=consumer expenditures Starting economy: Y1 = C + Leakages Ending economy: Y2 = C + Injections Yearly Economic change = Y2 - Y1 Yearly % 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 wasthe the change? 35 •What was government budget? T-G = 15-20= 5 deficit…good •What was thefor %economy change? 10% •What was the trade balance? X-IM=35-25=10 surplus…good for the economy •What was the investment savings balance? IS=30-10=20 surplus … good for the economy Factors Market D I S P Q S CONSUMERS PRODUCERS T Product Market D S IM P Q X G 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 Example: C=500, G=40, I=20, IM=35, T=45, X=25, S=30 •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?