Circular Flow of Economics

1138 WordsJul 13, 20085 Pages
The circular flow model is defined as the flow of resources from households to firms and of products to firms from households. These flows are accompanied by reverse flows of money from firms to households and from households to firms. The circular flow is comprised of the resource market, households, product market, businesses, and the government. Macroeconomics - The study of the aggregate (total) Behavior of the whole economy. Macroeconomics Aggregates: - Unemployment rate: Percent of people in the labor force is not working but searching for work. - Inflation rate: Percent rise in the average price of all goods and services. - GDP: Dollar value of all final goods and services produced within a country in a given year; output A…show more content…
Gross national product should equal the national income. GDP is the total market value of all final goods and services produced during a given period and time within the nations borders. Gross domestic product is the most common measure of the level of economic activity at the national level. Households own the economy 's resources ( Factors of production; land, labor, and capital) whose services they rent or sell to firms or businesses through factor markets in exchange for factor payments (rental payments, wage payments, interest, and profits). Households use their factor income to purchase goods and services, capital goods. Households also use part of their factor income to pay government taxes. 75% of national income is received as wages and salaries. Part of the income goes to the government as personal taxes, and the rest is divided between personal consumption expenditures and personal saving. Economists define saving as " the part of after-tax income which is not consumed." Households have two choices with their income after taxes, to consume or save. The desire or willingness to save depends on the size of your income, if your income is low, you may dissave. Saving and consumption vary directly with income, as the households get more income, they divide it between saving and consumption. Households offer labor service as a factor of production and businesses repay them with income or salaries. The fact that households consume a certain
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