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    Macroeconomics Circular Flow

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    Idha Rahma
    This document contains information about Idha Rahma Iswianti, her student ID number, and her study of macroeconomics and the circular flow model. It describes the circular flow between households and firms, with households supplying factors of production to firms and purchasing goods and services, while firms pay for factors and supply goods. It also discusses how savings acts as a leakage from the circular flow, but investment injects savings back in and prevents a decrease in total spending.

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    Macroeconomics Circular Flow

    Uploaded by

    Idha Rahma
    21 views3 pages
    This document contains information about Idha Rahma Iswianti, her student ID number, and her study of macroeconomics and the circular flow model. It describes the circular flow between households and firms, with households supplying factors of production to firms and purchasing goods and services, while firms pay for factors and supply goods. It also discusses how savings acts as a leakage from the circular flow, but investment injects savings back in and prevents a decrease in total spending.

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    CIRCULAR FLOW

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    This document contains information about Idha Rahma Iswianti, her student ID number, and her study of macroeconomics and the circular flow model. It describes the circular flow between households and firms, with households supplying factors of production to firms and purchasing goods and services, while firms pay for factors and supply goods. It also discusses how savings acts as a leakage from the circular flow, but investment injects savings back in and prevents a decrease in total spending.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    21 views3 pages

    Macroeconomics Circular Flow

    Uploaded by

    Idha Rahma
    This document contains information about Idha Rahma Iswianti, her student ID number, and her study of macroeconomics and the circular flow model. It describes the circular flow between households and firms, with households supplying factors of production to firms and purchasing goods and services, while firms pay for factors and supply goods. It also discusses how savings acts as a leakage from the circular flow, but investment injects savings back in and prevents a decrease in total spending.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    of 3

    Name : Idha Rahma Iswianti

    NIM : 19080304009

    Accounting Education 2019 I


    Macroeconomics
    Circular Flow
    I. Circular flow of Income
    The term circular flow of income or circular flow of economic activity refers to “a
    simple economic model which describes the circulation/flow of income between
    producers and consumers”.
    In the circular flow model, producer and consumer are referred to as "firms" and
    "households" respectively.
    a. Firms
     An organization that produces goods and services for sale. Main objective is
    to maximize profit in the production process.
     The two main functions are as follows:
     Produce goods and services and supply them in the market.
     Firms purchase inputs or raw materials from households to use them in the
    production process.
    b. Household
     It is a person or a group of people that share their income. The members of
    households have two functions:
     They supply different factors of production
     Members of household also work as consumers
    II. Two Sector model :
    a. The circular flow of income or circular flow is a model of the economy in which
    the major exchanges are represented as flows of money, goods and services, etc.
    between economic agents.
    b. The flows of money and goods exchanges in a closed circuit and correspond in
    value, but run in the opposite direction. The circular flow analysis is the basis of
    national accounts and hence of macroeconomics.

    III. Explanation of Figure


    Name : Idha Rahma Iswianti

    NIM : 19080304009

    Accounting Education 2019 I


     Firstly, the household sector supply their factors of production or factor services
    (labor, land, capital...) to the business sector through the factor market.
     Secondly the business sector pays the rewards to household sector for their
    contribution to the production in kinds of rent for land, interest for capital, and
    wages for laborers…
     Thirdly business sector supply their outputs or goods and services in the goods or
    product market.
     Fourthly household sector pays their income for consumption expenditure.
     Can we saw product market and factor market. Factor market refers to the market
    for selling and purchasing or hiring of factors of production like labor, land …
     Product market means the market in which the goods and services are supplying
    and demanding.
    IV. CFM with Saving & Investment
     When household save, their expenditure on goods & services will decline to that
    extent and as a result money flow to the business firms will contract.
     With reduced money receipts, firm will hire fewer worker or reduce the factor
    payments.
     This will lead to the fall in total incomes of the households. Thus, saving reduces
    the flow of money expenditure to the business firms and causes a fall in
    economy’s total income.
     Economists therefore call savings a leakage.
     Business firms borrow from the financial market for investment in capital goods
    such as machines, factories, tools & instruments etc.
     Thus, saving again brought into the expenditures stream and as a result total flow
    of spending does not decrease.
     So, investment is called as injection to economy.
    Name : Idha Rahma Iswianti

    NIM : 19080304009

    Accounting Education 2019 I


    Questions and Answer
    1. What happens if the household sector does a savings activity?
    The expenditure on goods & services will decline to that extent and as a result
    money flow to the business firms will contract. will lead to the fall in total incomes of
    the households. Thus, saving reduces the flow of money expenditure to the business
    firms and causes a fall in economy’s total income.

    2. What is the purpose of saving back into the flow of expenditure?


    Business firms borrow from the financial market for investment in capital goods such
    as machines, factories, tools & instruments etc. As aresult total flow of spending does
    not decrease.

    3. What are the determinants of household consumption?


     Disposable income
     Wealth
     Future income expectations
     Interest rate
     Inflation
     Income distribution
     Demographic factor
     Taste and preferences

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