Topic 1 Introduction_Money and Payments.pdf - INTRODUCTION MONEY AND PAYMENTS Topic 1 Chapter 1 3 Macroeconomic Framework ■ Four sectors of the

Topic 1 Introduction_Money and Payments.pdf - INTRODUCTION...

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INTRODUCTION & MONEY AND PAYMENTS Topic 1 Chapter 1 & 3
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Macroeconomic Framework Four sectors of the economy: 1. households 2. firms 3. government 4. the rest of the world Three types of markets: 1. the factor markets 2. the markets for goods and services 3. the financial markets
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A Circular-Flow Diagram (Four sector model) Government Firms Financial Markets Households Markets for Factors of Production Foreign countries Government purchases of goods and services Government borrowing - S G Private savings S P Transfer Payments Wages, profit, interest, rent Wages, profit, interest, rent Borrowing and stock issues by firms Foreign borrowing and sales of stock Foreign lending and purchases of stock Exports Imports GDP Taxes Consumer spending Investment
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A circular flow of funds connects the four sectors of the economy households, firms, government, and the rest of the world via three types of markets: the factor markets, the markets for goods and services, and the financial markets. Funds flow from firms to households in the form of wages, profit, interest, and rent through the factor markets. After paying taxes to the government and receiving government transfers, households allocate the remaining income disposable income to private savings and consumer spending.
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Via the financial markets, private savings and funds from the rest of the world are channeled into investment spending by firms, government borrowing, foreign borrowing and lending, and foreign transactions of stocks. In turn, funds flow from the government and households to firms to pay for purchases of goods and services. Finally, exports to the rest of the world generate a flow of funds into the economy and imports lead to a flow of funds out of the economy.
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If we add up consumer spending on goods and services, investment spending by firms, government purchases of goods and services, and exports, then subtract the value of imports, the total flow of funds represented by this calculation is total spending on final goods and services produced in the economy. Equivalently, it s the value of all the final goods and services produced in the economy that is, the gross domestic product of the economy .
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Different Kinds of Saving 1. Private saving (S P ) = The portion of households income that is not used for consumption or paying taxes = 2. Public saving (S G ) = Tax revenue less government spending =
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Different Kinds of Saving 3 . National saving (S) = private saving (S P ) + public saving (S G ) = = =
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