chapte3 - Chapter 3 I. Economic Actors 1. Circular- Flow A....

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Chapter 3 I. Economic Actors 1. Circular- Flow A. Simple Model i. This was Figure 3-1 in the book. ii. Households (Consumers) provide all the Factors of Production, while firms (Investment) provides all goods and services. iii. This means households are paid for their factors of production by firms and firms are paid for their output by households. iv. The exchange of output at market prices is called the Product or Goods Markets and the exchange of Factors of Production at market costs is called the Factor Markets. v. Government receives taxes from (inflows) and spends money (outflows) on Households and Firms. B. The Complex Model i. Government is included in the complex model, however it still looks at a closed economy, meaning no foreign trade. ii. The Complex Model Begins with the Simple Model, then adds flows to make it more realistic. iii.For one, households do not spend all of their money; some is saved, and some is taxed. The other addition is that the products firms produce get consumed not only by consumers, but also by the government as well as other firms. iv. From this analysis we see that all spending sectors are reliant on each other, and if spending in one sector falls, the others will
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contract as well. This is best understood in terms of leakages and injections. Leakages Injections Taxes (T) Gov’t Spending (G) Savings (S) Investment (I) v. If T=G (Gov’t has a balanced budget) and then T becomes greater than G, the economy will contract as the leakage has increased in relative dollar value. If it is G that increases beyond T, the economy will expand. vi. If I becomes greater than S, the economy will expand, and if S exceeds I, the economy contracts. 2. Households A. Functional Distribution of Income shows the portion of income that is going to each Factor of Production. The numbers for the 90’s show roughly 70% of income is wages, 20% is the combined profits of corporations and proprietors’ businesses, and rental and interest income together comprise slightly less than ten percent of the total national income. B. Family Income Distribution views pre-tax incomes of the poorest 20% (1 quintile=1/5), the next poorest 20%, the middle 20%, the wealthier 20%, and the wealthiest 20%. This income data then gets stated as a percentage of their share of the total income in that country. C. Graphing the family distribution of income, with percent of people in
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the total population on the horizontal and their percentage share of the total income on the vertical axis will yield the data points to form a “Lorenz Curve.” The straight line with a linear, direct relationship depicts total income equality (a condition rarely reported in any economy). The Curve shows, comparatively, how much inequality in income distribution exists. i.
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This note was uploaded on 08/04/2008 for the course ECON 1A taught by Professor Patyk during the Spring '08 term at Foothill College.

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chapte3 - Chapter 3 I. Economic Actors 1. Circular- Flow A....

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