CH 7.1

CH 7.1 - M acroeconomics accounts.Infact, ,themore...

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Macroeconomics Almost all countries calculate a set of numbers known as the  national income and product  accounts.  In fact, the accuracy of a country’s accounts is a remarkably reliable indicator of its state of  economic development—in general,the more reliable the accounts, the more economically advanced the country. When international economic  agencies seek to help a less developed country, typically the first order of business is to send a team  of experts to audit and improve the country’s accounts. In the United States, these numbers are calculated by the Bureau of Economic Analysis, a division of  the U.S. government’s Department of Commerce. The  national income and product   accounts , often referred to simply as the  national accounts , keep track of the spending of  consumers,sales of producers, business investment spending, government purchases,and a variety  of other flows of money between different sectors of the economy. Let’s see how they work. The national income and product accounts , or national accounts , keep track of the flows of money between different sectors of the economy. To understand the principles behind the national accounts, it helps to look at Figure 7.1 , a revised  and expanded  circular-flow diagram  similar to the one we introduced in  Chapter 2 . Recall that  in  Figure 2.7  we showed the flows of money, goods and services, and factors of production through  the economy. Here we restrict ourselves to flows of money but add extra elements that allow us to  show the key concepts behind the national accounts. As in our original version of the circular-flow  diagram, the underlying principle is that the inflow of money into each market or sector is equal to the  outflow of money coming from that market or sector.
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  An Expanded Circular-Flow Diagram: The Flows of Money Through the Economy 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 
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income— disposable income —to private savings and consumer spending. 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 
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This note was uploaded on 09/20/2011 for the course ECO 2023 taught by Professor Sabet during the Fall '08 term at FIU.

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CH 7.1 - M acroeconomics accounts.Infact, ,themore...

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