ethos VN. Dwivedi ee Te tedfeww Hill Companies 2 The Economy as a Circular Flow of Income and Expenditure INTRODUCTION In Chapter 1, we have intadaced macroeconomics yf the economy 2:3 whole in hs canprs "vs eles the ecreny he moma can ‘eine 5 an intertd ytem of production, exchange od sons. ying out tes ecoponic actin, people ate iveved in making te Stons—tey bay and sll gods ad sevice Eso aacton gen {ste two kine of ls) prt or el om es the Mow of gods nd ‘Srvc and (h) money dow Prt and mney fom i apo deston Ins eiutrfshion. The Production corso a) for flow at Mow of factor sees. and (goods flow tht Se ow of goods and semices. In monetized economs the flow of factor serie peeres, ‘money fons in te form of factor pment which ake the orm acon {oss The fate payment nd expends on Sonsumesgeads aa ees {ake he frm of expend flow Expedite Sow tin ee of money ow. Both incre and expenitare flow ina ela fashion in oppose ‘ecton. The entze economic stm can teefre be viewed a8 eculat ows of income and expentie. The magnitue of tae flows i at ‘keine the sae of atonal income. Sige major pan of ths book foncered with income determination i i ef to onesand te mec tin of income and expendue ows. How these Row ae gested ad ow they make te system work ae tbe subject mater of th caer, 1K may be noted atthe outset tat the mechanism of income and expen fms is extemely complex in realy, Te xenon: howent ‘se sinplifed modes llc the evar flows of income amd expend are To preset the flows of ume and expendi the ecnomy I ved io fear sector: (i) housebold sector: i) bps store the Fs: Gi) ovement svt: and (i) foreign Setar. Tee four tests ae combined flow of income, * © Twossctor made inlaing the howcholl and business sets: ‘The Economy ara Crear Flow of erm and Exendire 29) =| (i) Threesecoe mode ining the Howse snes an government) sectors and (cr ml soig bt ies sect) 2.4 CIRCULAR FLOWS OF INCOME AND EXPENDITURE IN A TWO-SECTOR MODEL. “te moet motel which comin uses and fi sess Tipton pieced scorny i which hee so goverment sd 0 {Sapeance’h wosecor mde! = abviesy an ease nde However, pentane a torsecr conomy pide sconce Sari pit Deore we aayee te iar uss snprtant 19 bnow te bas seated fonts fh Hosoi =a the rhs “Te kmachods are ssumed o poses een specie ets (the senehols ae the owas ll fas rato i thal nce caer een cere apo sl (Hts ae the ome. fa same pans nnd es el ie “oe busines fms on he or Bn at sumed 0 Rave te lowig SSNS fate or prodctne tnd aur und cop! om the howe Fetus they pede and sel gon an sere the Rose amd The fallow se mde psf hee Houses spol ial Same on by the fine. Tey Jo ota ay pat Tue They doe mit a Fiona ake fas payments tte onc nthe fre of rn snags ierest and roi vy Tse nfo oro Of ore oF of gos an nerves from any ouside souce "Th sssmption specie se and Sevtr models ving specified the male, we now describe and usrate te creo ‘tows of icine and expire i twosectr Oe30 Macmeconnis Teor an oly ‘The Circular Flows in a Two-Sector Economy: A Graphic Presentation “The working fs tworector economy td the cela flows of noosa expendi te unrated a Fig. 2.1 The hws ae reteset By the belied "Fis with thew respective caracterisis. A line daa Crm the nd he ocr hl Th oper a epee the factor marke ade twet Tic epset he commoniy marr th mae onerate to Kinds ‘Sf Rows—rea flows and mone flows Let Tit ok the el ad money Fig. 21 The Crclar Flows of Income and Expediue:TwoSector Mote In the factor market ie pp ha the aow labled “FOP” shows he ‘ow’ of fasion of procuton (FOP) fom the hase to the fm THs makes ther ow shows by = cominaoys sou. The wal fact flow ‘uses anther and a reverse flom that ithe flow of factor incomes (wags, meres Feat and pois) tom Be Sms the hows. Stace all faster payment (PF) are made in terms of sone. the ow of fctrit comes represents the money lo.‘The money few. shown By a dase Th Econo Ciel Foo fs Et pny te i oe ie commoaiy mat too flow epost Sen Bye ‘the gous and factor markess, we get i feature of income an expenditure Feawsrs lop Money flows (at constant pres) In the fot say, busch fie = factor pyets = the money value of oupat Dt Withdrawals, Injections wha the size of income Flows ey ie lea en mew aye ae eee danse alk 3 thw 2 ‘ta7 SE Menem Tt ee) AI 1 the wosectr model «withdrawl i he amount tht staid by the hoch an firms nd snot penton he damental pode gods tnd eracr over period of time For exaiple, when hoch pete 2p of tir income ws a poison for age oa «provision agaist te Toe fon 0, odo ot spend nen reuie sa whdavel TEs imporar o te hat svg ir wir When stings ‘ately spent nth for fiver, hey ae the for ns he ‘itrasals af comparable to the concept of oseding” Simla ns ‘hay aso wield par of tir otal rstps and ay turn Le SScuarRows in the fr of fac payin in anipaton of depres, ‘Sich wihdrawate reduce the se of he cea flow ‘On the other hana inc he amount hati pet By howsehals and frm nation to et comes generated wii the eur econ. 'am injection bythe hosel be exendare htey ke ion {fo wha hey receive fom the firms ator insomes. The Instn by the owshols ay Be inthe Fr of spending inhi svg on urls cry boring and spending ca comune goods. And a incton by the Tr ie expenaare wich they make im aon tot they resins fom te sala goods and services, Fs can niet money im the Sone) by spending the pst sings or By bering fom te ide oF te oda ‘ono. njecons heat these of he fw “The withleal and injections inthe tworecor model ae lsd ia "ig. 22. The ler hal of the figure shows te wihewal a injections Tea tess Fig, 22 Withdawal and nections inte Cela Flows ‘ese sing pes iy an sy fa. BRET 0 Creer ow fname ond pense "BSL tytie hochland te upper Half shows the witha ad injections by the firms te TwoSector Mode with savingr, Veni mia TOABUE Symes dey 88 fe In lly, ower Bs Taree Mehr re rome ir incxmet noe xin Be WS ong ont enw ne amet sig we a ae ee sn ctend ie twovectr oll tie the Sus arta cer tao ono one mal od ash “Sty Wari af ge oy finns ile ing a gs pang on othe ones et I ou sng we SU, Moc he fal tr lesa ts a totam te me cmp, at meee wc cept depots om he Bolsa es me Eee ce ne ro ons a vance. Te lr flows of SNe Aa entire tose nl with cap! mal iowa P23 eons ton, Fig. 23 Ciculr Flows in TwoSector Ml wit the Capital Mote Noe tate flow of facts of paducton and fair payments i. 23 ache Same ait Fig. 21. Us Fig 23, anew sei, bled as “Capital Marker har been adic. The movement of the dashed arrow, libel S hows the ow of bowseold savings he capital market Le. 1 te BanksBa scream Theo ind Poti pHs and iil eres (FI) nthe form of Spo The hanks and Fl aa amas tohyshrs a betes he is which inves poe cane ow i ny he Sashed row Iakelled “Mire into ofthe farcasstor: the hoasebads cones Yi aod ee prs Uy consumption exgeire (Ca 3 saving it eS (and ke een oes ofeach the Wie Ae eet. srampton expend () Ns det te fms, whereas ‘Ri ru eh ei ces Na i) Ae SEES comm of seston (0) he fia nay we find ta the re ame enced ty te es ows ack he fms which flows tack apa 10 Housel fstorpayens 2.2 CIRCULAR FLOWS OF INCOME AND EXPENDITURE WITH GOVERNMENT: JA THREE-SECTOR MODEL “Tee tresscor model formed by ang te goverment sexo 1 the Tre is nouet A theesevtor model depts a ace relic emB0=y a {SSndacs an government which lays an impor ole i he exonomy. The see mic afte govemment at osesed emendly dng he post risa rt forename, te a ofthe goverment expendire Gan ren om abot B percent i 150-51 to ove 0 percent i he eyes an the percentage af ak revenue to GNF, from 7 pecs 10 SRE ao ecem uring tis peso These tas re ch ihe in any “The incon of the government ito the model regres adding ad anlig te farts of governs Hac operations, However, [out ‘RNC aay tere we wil inl only he fal vile the clr Fase ec ane, goverment spenfing ov ses ad sve, peri ener payee Those varies have leet Kinds Fes 08 {he loooe and expend ws. “cc a ihr from he ms case ey rele private dspos- atte insane ans score, cosumpon expendi and stviags, On the iced, goverment expendi san injetion iat he scone sex. ‘Freemont eapenire ast the agpegte demand in he form of ‘Frcumest press of factor ences om the houschols sad goods and Sots tom he y=" svt. The tafe payment by the ever eeeSi ae persons, esis, unempi wun lowance, ee) ae i GE AaPEalar ts, They ail 0 te Bowsehold income which Leds {enweate in boosebnd demand for cosumer goo, The csc Rows of incomes an expendi in a tesetr mel ae stow i Fg 2 Tis figure present aly the money flows to ad From Fig. 24 Creu Flows of Incomes in 9 TheeSector Model se goverment. The fea (fonds) flow fom and to the goveret has eR ctoed in onder fo shou overcrowding in the gr, 1 rust be TSRTISSins tha coh tooney How (oncepteansfer pyencas) Bas 8 Soumfw inte fom of good flow. Te Fg. 24 the cer ow of incre and expenditure ae the same = i Fig 21 Hones i portato ear in ad ht te magne of ‘ow bewoun the houses nde fn seduced becnse 2 par of het Tones Rows tothe goverment set As the Hue shows. apa of the wc income cimed byte governent i he form of es es. ‘hn apa oe ims ening fated sway in he form of corporate ‘arb tax Te goverment sngoses inde acs also which collet Tye firms trom the sols ad ped on to the government The ‘beeumeat spends at tx revenue on wags sare and wafer ‘Spent the Nescolde ad pat of on pce from he ms and TeYtent of tll, Ts the man tt ows from tbe howeolds and [Rams othe goversment the form af xe Naw bck tes 08 {rhe form of goverameet expendi {nthe goverment tax revenue (7) ales equal 1 the goveramen expinti(G)? Net secs depends on te goveramett Boga Tee tan goverment ops lonced budget pole, then G = The evant aps aft budget pole, then © > T. An he goverSE necrscnamis: Tar ond Poly TT met flows surplus budge ploy, ten < TEA deft bude poicy Tac jecons im th economy Theft, tes kids of budet pares andthe exclr flows, On the cosy, 3 spas budget pic ‘ns et nhrewal the economy which rede the Sef te ‘Seale Bows 2.3 CIRCULAR FLOWS IN A FOUR-SECTOR MODEL: MODEL WITH THE FOREIGN SECTOR tn tis secon, we move to deci the crear flows of inome and ‘liar in foucsne msl The fursector mode is foened by wins FEEDS othe teesectr dl. The frig scion consis of #0 eee imereaea! taactions @) foreign tage ta sy expt aod [pon of gous an scien and (H) ino and otlow of capa: Te {Erounty wansacons make «complex system. For simpli sks, However we make the flowing astompons (Tow enteral seco consi only of exports nd ions of gos ad (oe cor and import of goods ad aeastour series ate made ly by te firs ad (i) The howshole expo aly labour “Te circular flows of inom and expedite ina foursetor model named in Fig. 2. Like Fig 24 he igre wo shows en the mone Bows, Inceds be bomen sind that ac one lw as scooter nots ow inthe oppoute deson. The lower at of this fgesbows ‘Saar Mw of one) in ones of frig wae Expons make ses tha °) ‘St fecgn comes in ns coy. Expat (represent tection the ISSRg Sma. pons (hse nl of gos and services and low SEimoney foreign exhange) out ofthe cou. Tis i ow of expendi ut of te econo Impons (M) presen witravals from the eclar flows, Anter ifow of iene i ginrated bythe expr. of manpower bythe Roseolds The port of manpower bigs in Torsipn remiances cena of foreign eachange, Theis seobet iflow of icone, These ows aod ution goon sonthaoul 5 ogg as there i foreign tae and spon of manpower Mo far a the effec of foreign de on the maga of the ovr circa Rows is conered it Spends 60th trade lence, which eqs SEM, Rea that X epost json: and A vepresets witha If XM, meats iow of fori income i greater thn the outiow of income’ or here tga fom foreign wade The ae gu irene te ‘Mrgnideofciclar ows of acme and expendi. By te same Ie T I Fig. 28 The Circular Flows oficome and Cxpendtne in FourSectr Made exec i decreases the magi of cela ows And if X= M, flow a aegcren eel Ths eaves te cca ows nae Suggested Readings — “LIPSEY RICHARD G An nvedction Poi commis, LBS an Weel ta, Eon Cha 7 i Pe ni they se 1 Beene ecanmy cea Bows fname nd pedi, Wat TeSnc he maa a the cer flow? dee Sind dinjsion? How do hey af eel Werte clacone sod expendi nan canoe?