Economics Circular Flow
The Economics of Business and Management
Assignment No. 3 & 4
Q1
Draw and label the circular flow model and use it to answer the following:
[pic]
The circular flow can be explained very easily with a simple formula.
GDP (gross domestic product) = C + I + G + X – Z= = C + S +T – B
In here C is the consumption, I is investments, G – government spending, S – savings. On the other hand X is export, Z is imports T is for taxes and B is the benefits. The circulars flow shows the way how real recourses and payments flow between organizations/firms and households.
a) What is meant by leakages?
Leakages can be defined as a non-consumption use of income, which includes savings, taxes and imports. As it is shown on the circular flow the savings are connected with the household. On the other hand the households are in the same scheme with the firms and as a whole to the national income. The import coming from other countries goes to the consumer. And the taxes which are also closely connected to the national income scheme, serve the government needs.
b) What are withdrawals?
Withdrawals are part of the circular flow of the income, and closely connected with the injections. They are apart of the economy such as imports. If withdrawals are more than injections a current country will face a deficit and negative economic growth. If withdrawals are less than injections then the same country will meet a budget surplus and economic growth.
c) What is equilibrium and how is it achieved? This occurs when injections are equal to withdrawals. The balance of injections over withdrawals will lead improvement in national income. Increasing the national income households will spend more money on domestic goods but at the same time they will save, pay more taxes, and buy more imports. That will lead to rise in the withdrawals. This will go on until the withdrawals are equal injections, and when this happens the equilibrium will attain.
Q2
Assignment No. 3 & 4
Q1
Draw and label the circular flow model and use it to answer the following:
[pic]
The circular flow can be explained very easily with a simple formula.
GDP (gross domestic product) = C + I + G + X – Z= = C + S +T – B
In here C is the consumption, I is investments, G – government spending, S – savings. On the other hand X is export, Z is imports T is for taxes and B is the benefits. The circulars flow shows the way how real recourses and payments flow between organizations/firms and households.
a) What is meant by leakages?
Leakages can be defined as a non-consumption use of income, which includes savings, taxes and imports. As it is shown on the circular flow the savings are connected with the household. On the other hand the households are in the same scheme with the firms and as a whole to the national income. The import coming from other countries goes to the consumer. And the taxes which are also closely connected to the national income scheme, serve the government needs.
b) What are withdrawals?
Withdrawals are part of the circular flow of the income, and closely connected with the injections. They are apart of the economy such as imports. If withdrawals are more than injections a current country will face a deficit and negative economic growth. If withdrawals are less than injections then the same country will meet a budget surplus and economic growth.
c) What is equilibrium and how is it achieved? This occurs when injections are equal to withdrawals. The balance of injections over withdrawals will lead improvement in national income. Increasing the national income households will spend more money on domestic goods but at the same time they will save, pay more taxes, and buy more imports. That will lead to rise in the withdrawals. This will go on until the withdrawals are equal injections, and when this happens the equilibrium will attain.
Q2