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

Info icon This preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
1 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.
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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 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 the total population on the horizontal and their percentage share of the total
Image of page 2
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. This is particularly useful in comparing one region’s income distribution to another regions’s, or comparing one region’s income distribution in the present year to its own income distribution in a previous year.
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern