L3. The circular flow of incomes

What is the key feature of all economies according to the lecture?

Exchange is the key feature of all economies.

What problem arises with barter exchange in larger economies?

The need to find buyers who simultaneously have what you wish to buy, known as the 'double coincidence of wants'.

How does money function in the context of macroeconomics?

Money serves as a medium of exchange and a store of value.

What does the circular flow model illustrate about the economy?

It illustrates a closed system where outgoing flows equal incoming flows without leakages or injections.

Who divided society into three social classes in the context of the circular flow model?

François Quesnay.

What are the three social classes identified by Quesnay?

1. Landlords (idle class) 2. Artisans (sterile class) 3. Farmers (productive class).

What is a 'stationary state' in Quesnay's model?

In Quesnay's model, a 'stationary state' refers to an economic condition where resources are fully utilized, and production levels remain constant over time. This state signifies a lack of economic development or innovation.

What modern components are included in the circular flow model of the economy?

Households and firms.

What assumption is made about market transactions in the modern circular flow model?

All market transactions result in added value.

What happens in a more realistic circular flow model involving households and firms?

Households save a portion of their income, and firms produce capital goods.

What is the relationship that exists in the closed flow between savings and investment?

Savings (S) are equal to gross investment (I).

What two extensions are needed for the circular flow model?

1. A government sector 2. The rest of the world.

How does the government contribute to the circular flow of income?

The government buys goods and services from firms and households, funded by taxes it levies.

In the expanded circular flow model, what are exports and imports?

Exports (X) are domestic production sold abroad, while imports (IM) are domestic income spent on foreign goods and services.

What are the three equivalent ways to measure national income and output?

1. The income measure 2. The output measure 3. The expenditure measure.

What is the definition of 'withdrawals' in the context of the circular flow?

Withdrawals are the leakages from the circular flow of income that occur when households save, pay taxes, or import goods and services, reducing the overall spending in the economy.

What characterizes injections in the circular flow of income?

Spending that does not arise out of domestic incomes and is thus exogenous.