Macroeconomics
● Households: They purchase goods and services from both domestic andforeignfrms since trade is not only limitedtothedomesticmarket .Householdsalsoownfactorsofproduction and sell them to frms in return for incomes in the form of rent, wages, interest and proft. This income is used to pay taxes to the government (e.g., income tax and sales tax) and to spend on goods and services . Theincomeleftafterpayingtaxesisreferredtoas disposable income . If disposable income is enough and not completely spent, part of it will make up private savings . ● Firms: Inadditiontotheirroleinthesimplecircularflow,frmsintheexpandedcircularfloware also involved in the purchase of goods and services . For example,afrmmightbuildanew warehouse or acquire new machines. This spending on productive physical assets allows for future economic benefts and is considered as investmentspending . ● TheGovernment: Governmentsinthecircularflowprovide transferpayments .Theseare cash payments made to households who do not supply goods, services, orlaborinreturn .Such paymentscanincludeSocialSecuritybenefts,welfarepayments,veterans’benefts,andsoon. Transfer payments, in addition to other government expenditures on goods and services
includingfederal,state,andlocalgovernments,makeup thetotal governmentspending .Governmentspendingis mainly fnanced through the taxes collected from frms and households , however,thegovernmentmight still need additional funds. In this case, funds are acquired from the fnancial market in which fnancial institutionsactasintermediariesbetweentheborrowers and lenders of money. These institutions can also be approached by households and frms whowishtosave and invest.
● Foreign Sector (Rest oftheWorld): Thissectionofthecircularflowinvolves theexchangeof goods,services,andfnancialassets(suchasstocksandbonds),withtherestoftheworld (other countries) . Domestically produced goods and services can be exported. Alternatively, residentsmightimportgoodsandservicesfromabroad.Inaddition,foreignfrmscansellshares and bonds in the fnancial market to domestic households and frms, and vice versa. The Equilibrium Level: Leakages vs. Injections In practice, money flows in and out of the circular flow. These flows are classifed under two types: leakages and injections. Leakages represent the withdrawals or the money going out of the circular flow of income. These reduce spending in the economy and include savings,taxes, and imports . Injections ,ontheotherhand,represent additions orthe moneygoinginto thecircularflowofincome. These add to spending in the economy and include investment,government spending, and exports .
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