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Modeling the Economy. Actors: 1. Consumers 2. Financial Institutions 3. Businesses 4. The Government...
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Transcript of Modeling the Economy. Actors: 1. Consumers 2. Financial Institutions 3. Businesses 4. The Government...
![Page 1: Modeling the Economy. Actors: 1. Consumers 2. Financial Institutions 3. Businesses 4. The Government 5. The Foreign Sector.](https://reader036.fdocuments.net/reader036/viewer/2022062719/56649ee15503460f94bf2342/html5/thumbnails/1.jpg)
Modeling the Economy
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Actors:
1. Consumers2. Financial Institutions3. Businesses4. The Government5. The Foreign Sector
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Circular Flow Model
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![Page 5: Modeling the Economy. Actors: 1. Consumers 2. Financial Institutions 3. Businesses 4. The Government 5. The Foreign Sector.](https://reader036.fdocuments.net/reader036/viewer/2022062719/56649ee15503460f94bf2342/html5/thumbnails/5.jpg)
Consumers can engage in 3 actions:
1. Consumption (C)2. Savings (S)3. Paying Taxes (T)
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FinancialInstitutions
S C Consumers
TGovernment
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Injection: Something that causes GDP to increase
Consumption is the first of 4 possible injections
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Leakages – things that, if increased, will lower GDP
Two of the three leakages in the economy are:
1. Savings2. Taxes
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Financial Institutions are:
1. Banks2. The Stock Market3. The Bond Market
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Consumers can borrow money to finance consumption (CB)
ex: car loan
Businesses can borrow money or sell stock in order to pay for new investment
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Investment (I) is the second injection into the economy
Just because money is saved doesn’t mean that it is invested
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Financial stocksBusinessesInstitutions bonds I
CB S C Consumers
TGovernment
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The Government
1. Collects Taxes (T) – leakage2. Spends Money (G) - injection3. Borrows Money (GB)4. Gives Transfer Payments to people (TP)
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If the government spends more than it collects in taxes, it has a budget deficit and must borrow money
A budget surplus exists when the government spends less than it collects in taxes
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Financial stocksBusinessesInstitutions bonds I
CB S C ConsumersTP TGovernment GB
G
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The Foreign Sector
1. Buys things made in the USexports (X) are the 4th injection
2. Sells things to the USimports (IM) are the 3rd leakage
3. Saves (FS)/ Borrows (FB)Money
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If exports are greater than imports, then the US has a trade surplus
If imports are greater than exports, then the US has a trade deficit
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http://www.census.gov/indicator/www/ustrade.html
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FSFinancial stocksBusinesses FBInstitutions bonds I Foreign
SectorCB S C X IM ConsumersTP TGovernment GB
G
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Injections:
1. Consumption (C)2. Investment (I)3. Government Spending (G)4. Exports (X)
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Leakages:
1. Taxes (T)2. Savings (S)3. Imports (IM)
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Every time something gets made, someone gets paid
1. labor is paid wages2. capital is paid interest3. land is paid rent4. entrepreneurs are paid profit
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FSFinancial stocksBusinesses FBInstitutions bonds I Foreign
SectorCB S C X IM ConsumersTP TGovernment Income GB wages, interest, rent, profit G