Circular flow of income

tier 1

Households: total of all consumers (final users of goods and services) in the economy

Factor market: household give resources (land, labor, capital) in exchange for money/income (wages, rents, dividends, profit)

Product market: firms give goods and services in exchange for spending on goods and services

Firms

Tier 2

Savings: deposits from people with surplus funds, leakage- saving funds instead of spending

Financial intermediary: e.g. banks

• Make deposits from people with surplus funds available to borrowers

• Enable accumulated savings to be directed to businesses growth- growing businesses employ more people, more people have more money to spend on goods and services

• Enable access to credit for households

Investment: spending by firms on capital goods, injection- increase total spending because businesses grow and increase spending on capital goods. When they grow, they employ more people. This creates jobs and generates income so employees spend have more to spend on good and services.

Although investments by businesses often come from household savings, investment can exceed savings when additional funds enter the economy through borrowing from overseas, retained business profits, or government spending. When investment is greater than savings, more money is injected into the economy than withdrawn, causing the economy to expand (increased production, income, and overall economic growth)

Tier 3

Taxes and rates: leakage- reduces funds for spending

Government:

• Government sets taxation level

• High taxation (less consumer spending, business can't grow as quickly, can't employ as many people (businesses have to pay more earnings to the government, reducing funds for investment (injection) and employment). can be used as a contractionary policy if there’s inflationary pressure or economy boom

• Low taxation: less funds for government services

• Providing welfare payments such as pensions, unemployment benefits, disability payments, etc.

• Providing essential services that would not be adequately provided by the market such as schools, hospitals, the emergency services, etc. They require subsidization for equal access (schools and hospitals) and are non-excludable (emergency services).

• Increasing and improving Australia's infrastructure including building roads, schools and hospital- these busineses grow and employ more people.

Government services: Injection- welfare increases individual's spending power. It funds essential services (schools) and infrastructure development, which increases demand for materials and labor, so businesses expand (economic growth) and hire more, creating jobs and income, boosting spending.

Tier 4

Imports:

• goods and services produced overseas that are purchased domestically or by Australian residents overseas and brought back to Australia. E.g. hotel fees are not imports, but clothes/electronics bought there and brought back are imports.

• leakages because money flows out of Australia's economy to pay for goods and services produced overseas. This reduces spending on domestic businesses, which can lower local production, income, and employment.

Overseas market:

all economic activity concerned with the production and consumption of exported and imported goods and services.

• Australia has an open economy- trading goods and services with other countries.

• small population so exports allow local businesses to access larger markets, boost growth and more jobs

• can’t produce all goods as efficiently as other countries- import from countries with cheaper goods than locally produced because of lower labor & production cost, economies of scale, efficient manufacturing process- allocate resources to areas where we have a comparative advantage, such as mining.

Exports:

• Domestic businesses export goods and services to consumers and producers in overseas countries.

• includes education and tourism

• Injections because they bring money into Australia's economy from overseas buyers. This spending increases demand for locally produced goods and services, leading to greater production, income, and employment.