2.3 Growth Assignment 2

1. 2.3 Growth Assignment 2 By QiwenSu

2. Draw a five sector CFM that includes all money and real flows Overseas Sector Financial Sector Part One B Investments Producers Import payments Savings Export receipts Consumption Govt Spending Income Taxes Households Taxes Government Sector Transfers

3. The circular flow model presented here is an accepted way to show the flow of goods and services in a market economy. In a mixed economy, the government plays an important role as well, but this is not shown in the circular flow model. Local, state, and federal governments also produce, or cause the production of, goods and services. Schools, highways, water-treatment plants, parks, and other facilities are examples of government spending. Governments take part of household incomes in the form of taxes, but they also inject money back into households in the form of wages. Some of that money goes back to the government in the form of taxes and still more goes into other places.

4. Explain the difference between the 2,3,4 and 5 sector models Households provide labour to the producers. In return they receive an income. This is then spent on goods and services produced by the producer. This is called consumer spending and is the money flow between the households and producers. An increase in consumer spending results in higher profit for firms, business confidence rises so investment and employment increases resulting in an increase in productivity and production. If households receive surplus income, they will save money in a financial institution and earn interest. The financial institution will then lend this money to the business/producers wanting to expand who will invest it. The government plays an integral part in any economy. The government collects taxes. Taxes are the main source of revenue for the government. These taxes are from the other sectors which government collects. The overseas sector provide us with a market for our exports and to provide us with goods and services we cannot produce as efficiently ourselves.

5. Explain the difference between injections and withdrawals by using examples. withdrawals and injections are both a part of the circular flow of income. Injections are things that are providing finance or services into the economy for example exports. Withdrawals on the other hand are the things that are being taken out of the economy such as imports eg. If withdrawals are bigger then injections the country would be facing a deficit and negative economic growth. If withdrawals are less then injections then a country would be facing a budget surplus and economic growth. Explain why injections are important for economic growth. Injections help cause economic growth because they increase the money supply. They cause income/ profit/ revenue/ employment to increase so spending increases. Business confidence increases so investment in capital increases. This results in an increase in output so GDP increases which is economic growth.

6. Use the model to explain how an increase in household savings causes growth. Part Two B Savings increase, which also increase for the financial sector banks and other organisations that help channel money from savers, firms investment can increase eg. more employers, firms buy more capital goods which increase productivity and production increases because more goods and services are being done so growth occurs. Use the model to explain how an increase in firms investment causes growth. Firms investments causes growth because the money flow between the households and producers cause an increase in consumer spending results in higher profit for firms, business confidence rises so investment and employment increases resulting in an increase in productivity and production. As a result growth increases.

7. Use the model to explain how an increase in resource use causes growth. As output increases amount of resources required increases to produce that good and service so consumer incomes increases of work and time put on that so the level of goods and services produced increases. Consumer spending increases more goods and services bring provided so growth increases. Use the model to explain how an increase in consumption causes growth Consumption spending increases by households spending on goods and services day to day which increases firms more confidence to increase its business which increases output. Incomes increase because there are more firms and more goods and services being produced.

8. Use the model to explain how an increase in exports causes growth. Exports increase because more consumers from overseas want to buy our goods and services which will increase export receipts, firms profits increase due to more goods and services being performed. Investments increases because more employments for more business and output increases due to more work being done. Which growth occurs Use the model to explain how an international event causes growth. International event being held in New Zealand results in an increase in tourism so export receipts increase more people spending in NZ so firms confidence increases opening more businesses so investment increases because more goods and services are sold which leads to surplus. Employment increases more jobs available which increases in income for households which leads to an increase in spending so growth occurs.