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Unformatted text preview: Chapter 4 THE CIRCULAR FLOW THE 4.1 THE EXPANDED CIRCULAR FLOW MODEL FLOW 4.2 GOVERNMENT, FINACIAL MARKETS AND INTERNATIONAL MARKETS AND 4.2.1 Government the provision of law and order services; the provision of goods and other services; improving equity in the distribution of income; influencing the general economic climate. 4.2.2 Financial markets 4.2.2 Meaning Borrowers – demanders of finance households, firms and governments that choose to spend more households, more than they earn in income or collect in revenue at some point in collect time. time. Savers – suppliers of finance Financial institutions through which savers can directly provide Financial funds to borrowers. funds households, firms and government that choose to spend less households, less than they earn in income or raise in revenue at some point in raise time. time. Saving part of income or revenue that is not spent at some point in time, part or the postpone spending until some time in the future. or 1. The Bond Market 1. Bond a certificate of indebtedness that specifies the certificate obligations of the borrower to the holder of the bond. (IOU) (IOU) Attributes term: the length of time until the bond matures credit risk: the probability that the borrower will fail to pay some of the interest or principal. (default) (default) tax treatment: the way in which the tax laws treat the interest earned on the bond. interest 2. The Stock Market 2. Stock a claim to partial ownership in a firm equity finance vs debt finance stock exchange, e.g. New York Stock Exchange, the e.g. American Stock Exchange, NASDAQ (National Association of Securities Dealers Automated Quotation system) Quotation prices are determined by the supply and demand for prices the stock in these companies. the stock index: an average of a group of stock prices 3. Bank 3. Financial intermediaries financial institutions through which savers can financial indirectly provide funds to borrowers indirectly Bank’s primary job to take in deposits from people who want to to save and use these deposits to make loans to people who want to borrow. people 4.2.3 International market 4.2.3 Export the factors and products that supply to the overseas markets overseas Import the factors and products that demand from the overseas overseas Current account balance deficit: import > export surplus: import < export 4.3 Measuring the size of the economy 4.3 4.3.1 GDP (Gross Domestic Product) the market value of all final goods and services the final produced within a country in a given period of time produced final versus intermediate iit can be measured by adding up t all expenditures on final output of firms all the incomes generated by production of final output all value added in production Classification nominal or current GDP • Values of GDP that have not been adjusted for price changes real or constant GDP • Values of GDP that have been adjusted for price changes Deflator the price level expressed as a decimal fraction of the original the price level price 4.3.2 Other measure of income 4.3.2 Gross national product (GNP) Net national product (NNP) National income Personal income Disposable personal income 4.3.3 The Components of GDP 4.3.3 GDP(E) = C+I+G+X-M C- Consumption I- Investment spending on goods and services by local, state, and federal spending government government X- Export expenditure spending on capital equipment, inventories, and structures, spending including household purchases of new housing including G- Government purchase spending by households on goods and services, with the spending exception of purchases of new housing exception spending on domestically produced goods by foreigners M- Import expenditure spending on foreign goods by domestic residents 4.4 EQUILIBRIUM IN THE CIRCULAR FLOW MODEL CIRCULAR Flows out of the circular flow Flows (withdraw) (withdraw) saving by households saving by firms taxes paid by household to taxes government government taxes paid by firms to taxes government government iimports of factors of mports production production iimports of goods and mports services services Flows into the circular flow Flows (injection) (injection) borrowing by households borrowing by firms transfers paid by governments transfers to households to transfers paid by governments transfers to firms to government purchases of government factors of production factors government purchases of government goods and services goods exports of factors of exports production production exports of goods and services S+T+M=B+F+G+X (B-S)+(F+G-T)+(X-M)=0 S- saving by households and firms T- total tax payment by household and firms M- total imports of factors and products B- total borrowing by household, firms and Bgovernments governments F- total transfer payments by government (social Fsecurity and welfare) security G- total purchase by government X- total exports of factors and products 4.5 ECONOMIC INDICATORS (1) 4.5 Inflation Unemployment percentage increase in the average price level over percentage some period of time in an economy. some percentage of people in the economy who would work percentage at the existing wage, but cannot find work at Economic growth measured by the percentage change in gross measured domestic product over some period of time after making an adjustment for inflation. making 4.5 ECONOMIC INDICATORS (2) 4.5 Balance of payments measured by the difference between export measured income and import expenditure. income Sustainability iin economy, it uses all the factors of n production that it has in such a way that the degree to which needs and wants can be met will be sustained for future generations. will Economic Growth Economic Productivity the amount of goods and services produced from each hour of a the worker’s time. worker’s Determinants physical capital • the stock of equipment and structures that are used to produce goods and the services services human capital • the knowledge and skills that workers acquire though education, training, the and experience and natural resources • the input into the production of goods and services that are provided by the nature, such as land, rivers, and mineral deposits. nature, technological knowledge • society’s understanding of the best ways to produce goods and services. Production Function Y = AF (L, K, H, N) Balance of Payments (1) Balance Trade balance = Income by exporting products - Expenditure by Expenditure importing products importing Net investment = Income by exporting factors of Net Income income from production production overseas overseas - Expenditure by Expenditure importing factors of production production interest on loans, rent on real estate, dividends on shares Net transfer Net received from overseas overseas = Transfers received from Transfers overseas overseas - Transfers paid Transfers overseas overseas remittances by foreign workers + transfers of assets by remittances migrants and foreign aid payments migrants Balance of Payments (2) Balance Current Current account balance balance = Trade Trade balance balance + Net investment Net income from overseas overseas - + Net transfer received Net from overseas from Net capital = Net flow from overseas overseas (total lending overseas (total + buying foreignowned assets) (total borrowing overseas (total + selling domestically owned assets) owned Balance of = Balance payment payment Current account + Net capital flows Current Net balance from overseas balance from + Statistical Statistical discrepancy discrepancy ...
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This note was uploaded on 12/06/2011 for the course BUSINESS Finance taught by Professor Qiuxin during the Summer '11 term at Nanjing University.

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