Assignment on: The Circular Flow

BANGLADESH UNIVERSITY OF BUSINESS

&TECHNOLOGY

Course Title: Macroeconomics

Course No: ECO-202

SUBMITTED TO:
Syed Shah Saad Andalib(SSA)
Lecturer in Economics

Bangladesh University of Business & Technology (BUBT).

SUBMITTED BY:
Name : Md. Golam Kibria
Program: BBA
ID : 09101101079
Intake : 20th
Section : 2

Date: 03-01-2010
 SL. No: Name of Topic Chap. No: Page. No:
1 What is Economic 1.1 1
2 3 Types of Economies 1.2 1
3 5 Features of Free Enterprise 1.3 1
4 U.S. Economic Goals 1.4 1
5 The Circular Flow 2 2
6 The Circular Flow Model 2.1 2
7 The Circular Flow Income 2.2 3
8 Leakages and Injections 2.3 5
9 Government and the Circular Flow 2.4 6
10 International Trade and the Circular Flow 2.5 6
11 The Circular Flow Diagram 2.6 6
12 Government’s Goal 3 7
13 Business Cycle 4 7
14 Measuring Economic Performance 5 8
15 Gross Domestic Product (GDP) 6 8
16 Most important indicator 6.1 8
17 GDP consists of three parts 6.2 9
18 Other Indicators 7 9
19 Inflation 8 9
20 Attempts to control inflation 9 9

Economics
Chapter: 1
1.1: The study of choices people make to satisfy their unlimited wants and needs.
Macro-economics – the study of choices made by countries or governments to satisfy their
unlimited wants and needs

1.2: 3 Types of Economies

Traditional
Command
Market
Free Enterprise

1.3: 5 Features of Free Enterprise

1. The right to own private property and enter into contracts
2. Make individual choices
3. Engage in economic competition
4. Make decisions based on self-interest
5. Participate in the economy with limited government involvement and regulation

1.4: U.S. Economic Goals

1. Freedom (Choice)
2. Efficiency (make best use of scarce resources)
3. Equity (fairness)
4. Security (protect the economy from situation that would harm the economic well being of
individuals and the nation)
5. Stability (full employment and stable prices)
6. Growth (increase the amount of goods and services produced)
Page: 1
Chapter:2

2.1: The Circular Flow Model

Stable Economy
If all income is spent business will sell all goods, and will be induced to produce all goods again
 Circular Flow - Simple Model

Resource Income

Productive Services

Businesses Households

Goods and Services

Spending for Goods and Services

Page: 2
Circular Flow Movie

2.2: Circular Flow of Income

Factor of Payments

Rent, Wage, Interest and Profit

 Economics Resources

Land, Labor, Capital, Enterprise

Business Households

Goods and Services

Consumption Expenditure

Figure: Circular Flow of Income Page: 3

In the upper loop of this figure the resources such as Land, Capital flow from households to
business firms as indicated by the arrow mark. In opposite direction to this money flows from
business firms to the households as factor payments such as wages, rent, interest and profits.

In the lower part of the figure, money flows from households to firms as consumption
expenditure made by the households on the goods and services produced by the firms while the
flow of goods and services is in opposite direction from business firm to households. Thus we
see that money flows from business firms to households as factor payments and then it flows
from households to firms. Thus there is a circular flow of income or money.

This circular flow of money will continue indefinitely week by week and year by year. This is
how the economy functions.

Page: 4

Leakages and Injections

2.3:
Leakages in the circular flow savings taxes
Injections in the circular flow investment government spending

Flow with Leakages/Injections

 Resource Income

Investment Loan Saving

able

Businesses Households

Spending Government Taxes

Spending for Goods and Services

Page: 5

Government and the Circular Flow

2.4:

Balanced budget:
–amount spent by government = amount collected in taxes

Surplus budget
–amount spent by government = less than that collected in taxes

Deficit budget
–amount spent by government = more than that collected in taxes
2.5

International Trade and the Circular Flow

IMPORTS are a leakage
EXPORTS are an injection
If exports = imports, the circular flow is in balance
Usually it is not balanced called a trade deficit, because imports (leakages) are greater than
exports (injections)

2.6: The Circular Flow Diagram

The circular-flow diagram presents a visual model of the economy as coordinated by the
four key markets.
First, the resource market (bottom loop) coordinates the actions of businesses demanding
resources and households supplying them in exchange for income.
Second, the goods & services market (top loop) coordinates the demand (consumption,
investment, government purchases, and net-exports) for and supply of domestic production
(GDP).
Third, the foreign exchange market (top right) brings the purchases (imports) from foreigners
into balance with the sales (exports plus net inflow of capital) to them.
Fourth, the loan able funds market (lower center) brings the net saving of households plus the
net inflow of foreign capital into balance with the borrowing of businesses and governments.
Page: 6

Chapter: 3 Government’s Goal

Make decisions that improve the economy
Measure the economy to see how it’s doing
Business Cycle – ups and downs of the economy
Helps experts predict what will happen to the economy
Chapter:4 Business Cycle
Phase 1 – General Prosperity
Economy going up
People buying more goods and services
Businesses producing more goods and services and hiring more employees
Phase 2 – Boom Period
Economic activity at a peak
Businesses working and selling at full capacity
Phase 3 – Slow Down
People buying fewer goods and services
Businesses cutting back production and laying off workers; some forced out of business
Phase 4 – Recession
Production at lowest point
High unemployment
Reduced spending on goods and services
Depression – severe recession
Fiscal Policy – the way government taxes citizens and spends money
Recession – gov’t spends more money or cuts taxes
Defense
Roads
Public housing
Monetary Policy – the way the government regulates the amount of money in circulation
(Federal Reserve System)
Raises and lowers interest rates
Page: 7

Chapter: 5 Measuring Economic Performance

How many people are working this month?

How much did consumers spend last year?
How much money did the steel industry make last year?
Answers to these questions are called:
Economic Indicators
Because they indicate how the economy is performing

Chapter: 6 Gross Domestic Product (GDP)

6.1: Most important indicator:

Total value of all the goods and services produced within the nation each year
All cars, planes, tv’s, shoes, and so on in this country
All the money spent on doctors, lawyers, car repairs, restaurant meal and so on in this country

Final versus Intermediate Goods

Final Goods and Services
Manicures
Bread
Cruise missile

Final versus Intermediate Goods

Intermediate Goods
Window glass in new automobiles
Lumber in a new house
Screws used in a cruise missile
Flour for making bread
Cloth for making dresses
Page: 8

6.2: GDP consists of three parts

Consumer goods and services, government purchases of goods and services, and investment
goods.
C = family (household) spending on consumer goods and services
G = government purchases of goods and services
I = spending by firms and households on new capital such as factories, tools, inventory increases
or decreases, and new houses
Gross Domestic Pizza Activity

Chapter: 7 Other Indicators

Personal Income – before taxes
Disposable Income – after taxes
Indicates the “Standard of Living”

Chapter:8 Inflation

General rise in the price of goods and services

Demand Prices
EFFECT - prices rise money buys less =
Decrease in the standard of living

Chapter: 9 Attempts to control inflation

Raise interest rates = more expensive to borrow money

Raise taxes and cutting spending = decrease in the amount of money in circulation
Businesses supply more than demand = price drops
Consumers save more than they spend = price drop
Page: 9