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Modeling the Economy

Modeling the Economy. Actors: 1. Consumers 2. Financial Institutions 3. Businesses 4. The Government 5. The Foreign Sector. Circular Flow Model. Consumers can engage in 3 actions: 1. Consumption (C) 2. Savings (S) 3. Paying Taxes (T). Financial Institutions S C Consumers T Government.

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Modeling the Economy

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  1. Modeling the Economy

  2. Actors:1. Consumers2. Financial Institutions3. Businesses4. The Government5. The Foreign Sector

  3. Circular Flow Model

  4. Consumers can engage in 3 actions:1. Consumption (C)2. Savings (S)3. Paying Taxes (T)

  5. FinancialInstitutions S CConsumers TGovernment

  6. Injection: Something that causes GDP to increaseConsumption is the first of 4 possible injections

  7. Leakages – things that, if increased, will lower GDPTwo of the three leakages in the economy are:1. Savings2. Taxes

  8. Financial Institutions are:1. Banks2. The Stock Market3. The Bond Market

  9. Consumers can borrow money to finance consumption (CB)ex: car loanBusinesses can borrow money or sell stock in order to pay for new investment

  10. Investment (I) is the second injection into the economyJust because money is saved doesn’t mean that it is invested

  11. Financial stocks BusinessesInstitutions bonds ICB S CConsumers TGovernment

  12. The Government1. Collects Taxes (T) – leakage2. Spends Money (G) - injection3. Borrows Money (GB)4. Gives Transfer Payments to people (TP)

  13. If the government spends more than it collects in taxes, it has a budget deficit and must borrow moneyA budget surplus exists when the government spends less than it collects in taxes

  14. Financial stocks BusinessesInstitutions bonds ICB S CConsumersTP TGovernment GB G

  15. The Foreign Sector1. Buys things made in the USexports (X) are the 4th injection2. Sells things to the USimports (IM) are the 3rd leakage3. Saves (FS)/ Borrows (FB)Money

  16. If exports are greater than imports, then the US has a trade surplusIf imports are greater than exports, then the US has a trade deficit

  17. http://www.census.gov/indicator/www/ustrade.html

  18. FSFinancial stocks Businesses FBInstitutions bonds I Foreign SectorCB S C X IMConsumersTP TGovernment GB G

  19. Injections:1. Consumption (C)2. Investment (I)3. Government Spending (G)4. Exports (X)

  20. Leakages:1. Taxes (T)2. Savings (S)3. Imports (IM)

  21. Every time something gets made, someone gets paid1. labor is paid wages2. capital is paid interest3. land is paid rent4. entrepreneurs are paid profit

  22. FSFinancial stocks Businesses FBInstitutions bonds I Foreign SectorCB S C X IMConsumersTP TGovernment Income GB wages, interest, rent, profit G

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