BG - Households, Businesses and Government in the Economy Lesson

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Households, Businesses and Government in the Economy

The Federal Reserve Bank of Atlanta Circular Flow What roles do households, firms, and government play in markets? Microeconomics The Circular Flow Model In the product market, firms are the sellers (supply) and households are the buyers (demand). Counter clockwise: goods and services, factors of production, labor, capital, land, entrepreneurship. Clockwise: spending, revenue, wages, interest, rent, profit, income. Product market and Resource market are inside the flow model as well as Households and Firms. In the resource market, households are the sellers (supply) and firms are the buyers (demand). Resource Market Factors of Production Land includes all production inputs provided by nature (natural resources). Labor is the work of employees possessing human capital. Capital includes all human-made goods used in the production of other goods and services. Entrepreneurship --entrepreneurs take risks and organize the factors of production to start a business. Product market Goods and Services Goods are items we buy that are tangible. Soccer balls and cell phones are tangibles. Services are intangible and usually involve paying a firm to do something for you. Attending a soccer match and having cell phone service are intangibles. Government in the Circular Flow In a three-sector circular flow diagram, government is a buyer (demand) in both the product and resource markets. Government provides public goods, public services, and transfer payments to households and firms in exchange for tax payments. Money Flows Wages/Salaries Payments to households (income) in the resource market for selling labor. Interest Payments to households (income) in the resource market for lending money for capital purchases. Rent Payments to households (income) in the resource market for the use of land. Profit Payments to households (income) in the resource market to entrepreneurs whose business revenue exceeds costs Revenue Money received by firms in the product market in exchange for goods and services. Flows to and from Government Taxes Payment to government in exchange for public goods and services. Transfer Payments Payments, excluded from GDP, from government to households without a reciprocal exchange of resources. Public Goods and Services Goods and services like bridges and schools financed by tax dollars on behalf of society. Subsidies Payments, excluded from GDP, from government to firms without a reciprocal exchange of goods or services. Measuring the Economy Using the Circular Flow Product Market Calculation Gross Domestic = Personal Consumption + Private Investment + Government Expenditures + Net Exports Formula is C + I + G + NX Resource Market Calculation National Income Accounting = Wages + Interest + Rents + Profits Formula is W + I + R + P  

Circular Flow Model

 

Review Households, Business, and Government in the Economy

 

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