Well be looking at a model of an

We’ll be looking at a model of an economy This is an economic model that attempts to explain the real world. It simplifies all that goes on in a real economy and just focuses on what is considered important. We start with something very simple, and gradually build a more detailed and complex model. So, while we get closer to reality, it is still only a model.

First, the productive sector employs resources (such as labour) and uses them to create goods and services (output). the Firm

Households consume these goods and services and provide Firms with the resources (such as labour) that they require. Households

The activities of Households and Firms are linked. Households provide resources to Firms and earn income (such as salaries and wages) in exchange. Firms produce goods and services which they sell to Households Firms

Households provide resources to Firms and earn income (such as salaries and wages) in exchange. Firms produce goods and services which they sell to Households. Resources and goods and services flow one way These are called Real Flows because they are physical items Money Flows go in the other direction Households Firms

This is called the Circular Flow Model. It is made up of Real Flows and Money Flows. Households Firms

This is called the Circular Flow Model. It is made up of Real Flows and Money Flows. Income Households Resources Firms Goods and Services Consumer Spending Task

Expanding the Model Households and Firms are not the only sectors in the economy. Before expanding the model, we will simplify it by only using money flows from now on. Income Households Resources Goods and Services Consumer Spending Firms

So, are two new money savings and companies investment. The there Financial Sector includesflows, banks, insurance and other financial institutions. Households save any income not spent with this sector Firms go to banks to borrow funds for expansion: new factories, new machines or research and development. This is called investment. Income Households Firms ing v Sa Consumer Spending nt e m st s e Inv Finance Sector Task

The Government in NZ accounts for over 35% of all economic activity. It collects direct tax from households (PAYE) as well as indirect taxes from firms (GST, excise taxes. . . ) Income Households Firms Taxes ing v Sa Consumer Spending st nt e m s e Inv Finance Sector

This taxation revenue is then used to make transfer payments such as: • social welfare benefits to NZ’s most vulnerable citizens, • subsidies to business for merit goods such as medicines, • other goods and services such as police, hospitals, roading. . . Income Households Firms Taxes Transfers Subsidies Government Spending v Sa Consumer Spending nt e m st s e Inv Finance Sector Task

Another sector to add is the Overseas Sector. Firms sell their products to foreign buyers, earning export receipts. A real flow of exports is matched by a money flow, export receipts. Income Households Firms Taxes Transfers Subsidies Ex po Government Spending gs st ve In Finance Sector t t n me por Ex vin Sa Consumer Spending Re cei pts rts

Firms also import goods and services to use or sell. The real flow of imports is matched by the money flow, import payments. Income Households Firms Taxes Transfers Subsidies Government Spending ents Ex Ipmort pos r Paym Taxes Import ts gs st ve In Finance Sector t t n me por Ex vin Sa Consumer Spending Re cei pts

Our new model, showing money flows only, now looks like this. Income Households Firms Taxes Transfers Subsidies ents Paym Taxes Import Im Government Spending po rts gs est v In Finance Sector t t n me por Ex vin Sa Consumer Spending Re cei pts

Our new model, showing money flows only, now looks like this. Income Households Firms Taxes Task Taxes Paym Transfers Import Subsidies ents Government Spending gs est v In Finance Sector t t n me por Ex vin Sa Consumer Spending Re cei pts

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Income Resources Households In which flow or sector would you classify the following? Firms Goods and Services A yacht Goods/Services The buyer of a yacht Households Money spent on a yacht Consumer Spending Timber for the decking Resources A yacht manufacturer Firms A boat builder Resources Wages paid to a boat builder Income Payment for timber Income Profits from the sale of yachts Income Consumer Spending ANSWERS Back

Income Savings can be defined as income not spent Households Firms Investment can be defined as the creation of capital goods Consumer Spending nt gs vin Sa Using these definitions, classify the following into one of the money flows: Lee deposits money in the bank Savings Lee buys a van Consumer Spending LBJ Ltd buys a van Investment Lee buys shares in LBJ Savings e stm e Inv Finance LBJ uses a share float to expand their factory Investment Lee receives his salary Income Lee gets a dividend on his shares Income LBJ researches a new product Investment ANSWERS Back

Income Transfer Payments are a one-way payment with no exchange occuring. Households Firms Subsidies Transfers Govt Spending Consumer Spending nt gs vin Sa Government spending only refers to spending on goods and services when an exchange of funds for commodities does occur. Taxes Government Spending or Subsidy or Tax or Transfer Payment? Unemployment benefit Transfer Payment Company taxes Tax (from firms) Free doctors visits for under 5 s Subsidy Road User Charges Tax (from firms) Working for Families payment Transfer Payment e stm e Inv Finance ANSWERS Purchase of new desks for classrooms Government Spending Back

Income Households Import Firms Taxes Paym Subsidies Transfers ents Govt Spending en gs m est Inv t t por Ex Consumer Spending vin Sa In which money flow or sector would you classify the following? Re cei pts Finance Sector The Leeming Family Household Noel Leeming Appliances Firm Noel Leeming goes to work Income Leigh Leeming buys a new fridge Consumption F&P builds a new assembly line Investment F&P dish drawers are sold in Namibia Leigh’s new fridge is produced in Australia Export Receipts Import Payment ANSWERS

gs n i v sa Copy this chart, then label the flows and sectors using the list below: • • • JH Whittaker and Sons Ltd Payment for imported cocoa beans Whittakers purchase a new grinder Chocolate lovers Westpac Bank Income from exported peanut slabs Ghana Sante Bar purchases Factory workers wages