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We’ll be looking at a model of an economy

We’ll be looking at a model of an economy. This is an economic model that attempts to explain the real world. It simplifies all that goes on in a real economy and just focuses on what is considered important.

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We’ll be looking at a model of an economy

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  1. We’ll be looking at a model of an economy This is an economic model that attempts to explain the real world. It simplifies all that goes on in a real economy and just focuses on what is considered important. We start with something very simple, and gradually build a more detailed and complex model. So, while we get closer to reality, it is still only a model. This is an economic model that attempts to explain the real world. It simplifies all that goes on in a real economy and just focuses on what is considered important. This is an economic model that attempts to explain the real world.

  2. How does our economy work? First, the productive sector employs resources (such as labour) and uses them to create goods and services (output). the Firm

  3. How does our economy work? Households consume these goods and services and provide Firms with the resources (such as labour) that they require. Households

  4. Households Firms How does our economy work? The activities of Households and Firms are linked. Households provide resources to Firms and earn income (such as salaries and wages) in exchange. Firms produce goods and services which they sell to Households.

  5. Resources Incomes Households Firms Consumer Spending Goods & Services How does our economy work? Households provide resources to Firms and earn income (such as salaries and wages) in exchange. Firms produce goods and services which they sell to Households. Resources and goods and services flow one way These are called Real Flows because they are physical items Money Flows go in the other direction

  6. Households Firms How does our economy work? This is called the Circular Flow Model. It is made up of Real Flows and Money Flows.

  7. Households Firms The Circular Flow Model This is called the Circular Flow Model. It is made up of Real Flows and Money Flows. Income Resources Goods and Services Consumer Spending Task

  8. Income Resources Households Firms Goods and Services Consumer Spending The Circular Flow Model Expanding the Model Households and Firms are not the only sectors in the economy. Before expanding the model, we will simplify it by only using money flows from now on.

  9. Income Households Firms Consumer Spending Savings Investment Finance Sector The Circular Flow Model So, there are two new money flows, savings and investment. The Financial Sector includes banks, insurance companies and other financial institutions. Households save any income not spent with this sector Firms go to banks to borrow funds for expansion: new factories, new machines or research and development. This is called investment. Task

  10. Income Households Firms Consumer Spending Savings Investment Finance Sector The Circular Flow Model The Government in NZ accounts for over 35% of all economic activity. It collects direct tax from households (PAYE) as well as indirect taxes from firms (GST, excise taxes...) Taxes Taxes

  11. Income Households Firms Consumer Spending Savings Investment Finance Sector The Circular Flow Model This taxation revenue is then used to make transfer payments such as: • social welfare benefits to NZ’s most vulnerable citizens, • subsidies to business for merit goods such as medicines, • other goods and services such as police, hospitals, roading... Transfers Subsidies Taxes Taxes Government Spending Task

  12. Income Households Firms Exports Consumer Spending Export Savings Investment Receipts Finance Sector The Circular Flow Model earning export receipts. Firms sell their products to foreign buyers, Another sector to add is the Overseas Sector. is matched by a money flow, export receipts. A real flow of exports Transfers Subsidies Taxes Taxes Government Spending

  13. Income Households Firms Import Payments Exports Imports Consumer Spending Export Savings Investment Receipts Finance Sector The Circular Flow Model Firms also import goods and services to use or sell. is matched by the money flow, import payments. The real flow of imports Transfers Subsidies Taxes Taxes Government Spending

  14. Income Households Firms Import Payments Imports Consumer Spending Export Savings Investment Receipts Finance Sector The Circular Flow Model Our new model, showing money flows only, now looks like this. Transfers Subsidies Taxes Taxes Government Spending

  15. Income Households Firms Import Payments Consumer Spending Export Savings Investment Receipts Finance Sector The Circular Flow Model Our new model, showing money flows only, now looks like this. Transfers Subsidies Taxes Taxes Task Government Spending

  16. End of slide show, click to exit

  17. Households Firms Income Resources Goods and Services Consumer Spending In which flow or sector would you classify the following? A yacht Goods/Services The buyer of a yacht Households Money spent on a yacht Consumer Spending Timber for the decking Resources A yacht manufacturer Firms A boat builder Resources Wages paid to a boat builder Income ANSWERS Payment for timber Income Profits from the sale of yachts Income Back

  18. Income Consumer Spending Savings Investment Households Firms Finance Savings can be defined as income not spent Investment can be defined as the creation of capital goods Using these definitions, classify the following into one of the money flows: Lee deposits money in the bank Savings Lee buys a van Consumer Spending LBJ Ltd buys a van Investment Lee buys shares in LBJ Savings LBJ uses a share float to expand their factory Investment Lee receives his salary Income ANSWERS Lee gets a dividend on his shares Income LBJ researches a new product Investment Back

  19. Income Consumer Spending Savings Investment Households Firms Finance Transfer Payments are a one-way payment with no exchange occuring. Government spending only refers to spending on goods and services when an exchange of funds for commodities does occur. Govt Spending Government Spending or Subsidy or Tax or Transfer Payment? Taxes Transfers Subsidies Taxes Unemployment benefit Transfer Payment Company taxes Tax (from firms) Free doctors visits for under 5s Subsidy Road User Charges Tax (from firms) Working for Families payment Transfer Payment ANSWERS Purchase of new desks for classrooms Government Spending Back

  20. Income Import Payments Consumer Spending Export Savings Investment Receipts Households Firms Finance Sector Govt Spending In which money flow or sector would you classify the following? The Leeming Family Household Taxes Transfers Subsidies Taxes Noel Leeming Appliances Firm Noel Leeming goes to work Income Leigh Leeming buys a new fridge Consumption F&P builds a new assembly line Investment ANSWERS F&P dish drawers are sold in Namibia Export Receipts Leigh’s new fridge is produced in Australia Import Payment

  21. savings Copy this chart, then label the flows and sectors using the list below: • JH Whittaker and Sons Ltd • Payment for imported cocoa beans • Whittakers purchase a new grinder • Chocolate lovers • Westpac Bank • Income from exported peanut slabs • Ghana • Sante Bar purchases • Factory workers wages

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