chapter-8-circular-flow

Chapter8:CircularFlowofIncome(收入循环流)1.Circularflowofincome1.1Circularflowofincome1.2Savingandinvestment1.3GovernmentSpendingandTaxation1.4ExportsandImports2.Growthanddeclineinthecircularflow2.1Aggregatedemand2.2Multipliereffect1.CircularFlowofIncome1.1.CircularFlowofIncome•Nationalincomeisdeterminedandinfluencedbylevelsofemployment,outputandstandardofliving.•Now,weneedtoknowhowincomeflowsaroundtheeconomy.•Households(家庭)buycommoditiesfromfirms,usingtheincomeindividualsreceivefortheirlabourandcapitalsuppliedtofirms.•Thefirms(企业)usetheincomereceivedfromthesaleofcommoditiestopayforthelabourandtoinvestinnewpremises,plantandequipment.•Thismovementiscalledcircularflowofincome.DiagramofCircularFlowofIncome支出法收入法产出法DynamicCircularFlow•Intherealworld,theflowofincomeisneverstatic.Aportionofincomeofhouseholdsissavedinsteadofspent.•Alsofirmsdonotpayoutalloftheirincomes,acertainproportionisinvested.InjectionandWithdraw•Therearethreesetsofinjectionsandwithdrawalswhichcanalterthecircularflowofincomeinaneconomy:•Injection(J,注入)ismoneyenteringtheflow.Aninjectionisanyexpenditurereceivedbyfirmsinthebusinesssectorthatdoesnotcomefromthehouseholdsectorintheformofconsumptionandthusdoesnotdependonthecurrentlevelofincome.•Withdrawal(W,抽出)ismoneyleavingtheflow,orisincomereceivedwithinthecircularflowthatdoesnotflowdirectlyback.•Injectionsincludeinvestment,governmentspendingandExports.•Withdrawalsincludesaving,taxationandimports.CircularFlowwithWithdrawsandInjectionsTaxes(T)WithdrawalsSavings(S)Imports(M)HouseholdsIncomeConsumption(Y)(C)FirmsGovernmentSpending(G)InjectionsInvestment(I)Exports(E)1.2.SavingandInvestmentSavinginvestmentSaving(S)•Savingistheportionofincomewhichisnotspentontheconsumption.Savingsarewithdrawnfromthecircularflowofincome.•Ineconomics,personalsavinghasbeendefinedaspersonaldisposableincomeminuspersonalconsumptionexpenditure.Inotherwords,incomethatisnotconsumedbyimmediatelybuyinggoodsandservicesissaved.•Forexample,householdsdepositmoneyintobanksorotherfinancialinstitutions,orjustretainmoneyintreasuries.InfluenceofSavings•Thebiggestsinglefactorwhichaffectssavingsisthelevelofincome.Thehigherthelevelofincome,themoreofitislikelytobesaved.•Itisacceptedthat“thrift”orsavingisagoodthing,itmaynotbesogoodfortheeconomyasawhole.•Ifacountrysavestoomuchofitsincomethisiswithdrawnfromthecircularflowandtheflowwilldecrease.Thismeansthatlessincomecirculatesandeconomicactivityisreduced.•Thepublicarethemainsavers.Investment(1)•Investmentisthespendingoncapitalgoods.•Inotherwords,ineconomics,investmentisbuyingandproducingcapitalgoodswhicharenotconsumedbutaretobeusedforfutureproduction.(someonethinks:includinghouseholdpurchasesofnewhousing).•Savingscanbeinjectedbackintothecircularflowintheformofinvestment-loansfrombanks,buildingsocieties(afinancialinstitution,ownedbyitsmembers,thatoffersbankingandotherfinancialservices,especiallymortgagelending),insurancecompaniesetc.•Examplesincludetangibles(suchasbuildingarailroadorfactory)andintangibles(suchasayearofschoolingoron-the-jobtraining).Investment(2)•Whenbusinesses,consumersandgovernmentsinvest,thisincreasesthecircularflowofincome,andaddstotheeconomy’sproductivepotential.•Themoreacountryinvests,themoreproductiveandprosperousitbecomes.InvestmentinFinance•Infinance,investment=costofcapital,likebuyingsecuritiesorothermonetaryorpaper(financial)assetsinthemoneymarketsorcapitalmarkets.•Typesoffinancialinvestmentsincludeshares,otherequity(普通股)investmentandbonds(债券).Thesefinancialassetsarethenexpectedtoprovideincomeorpositivefuturecashflows,andmayincreaseordecreaseinvaluegivingtheinvestorcapitalgainsorlosses.•Someonesoldthestock,someoneboughtit.Brokersarrangedthetransactionsandtookacommission.Fromthepointofviewofoveralleconomy,theeconomyhasnotexperiencedanynewinvestment.Investmentisanincreaseintheeconomy’scapacitytoproducegoodsandservicesandisdonebybusinessforprofit.RelationshipbetweenSavingandInvestment(1)•But,thereisconnectionbetweensavingandinvestment.Mostofthetime,investmentbybusinessisfinancedwithborrowedfunds,anditisthesavingsintheeconomythatprovidethepoolofloanablefunds.•Inshort,thesavingsavailableintheeconomy,whichbecomeloanablefunds,enablebusinessinvestmenttooccur.•Thetermssavingandinvestmentcansometimesbeconfusing.Mostpeopleusethesetermscasuallyandsometimesinterchangeably.RelationshipbetweenSavingandInvestment(2)•Bycontrast,themacroeconomistswhoputtogetherthenationalincomeaccountsusethesetermscarefullyanddistinctly.•E.g.SupposethatLarryearnsmorethanhespendsanddepositshisunspentincomeinabankorusesittobuyabondorsomestockfromacorporation.BecauseLarry’sincomeexceedshisconsumption,headdstothenation’ssaving.Larrymightthinkofhimselfas“investing”hismoney,butamacroeconomistwouldcallLarry’sactsavingratherthaninvestment.•Inthelanguageofmacroeconomics,investmentreferstothepurchaseofnewcapital,suchasequipmentorbuildings.RelationshipbetweenSavingandInvestment(3)•E.g.WhenMoeborrowsfromthebanktobuildhimselfanewhouse,headdstothenation’sinvestment.•Similarly,whentheCurlyCorporationsellssomestockandusesthepr