$13 The Economy as a Circular Flow
exchange - appears to be a central phenomenon.
exchange of goods
exchange of money
obviously, the circular flow of commodities is complemented by a circular flow of money.
-> The directions of these two circular flows are opposed - but, in other respects, theay are equivalent.
-> when looking at the economy as a whole, one of the two flows can be eliminated.
principle in the analysis of the circular flow
"axiom of the closed flow"
It states that, for every aggregate of individuals, the sum of the outgoing flows must be equal to the sum of the ingoing ones.
- is a parallel to the proposition in physics that energy can neither be gained nor lost.
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$14 The Circular Flow-Model of FRANCOIS QUESNAY
FRANCOIS QUESNAY, a French medical practitioner, was founder of the first economic school, the physiocracy. Inspired by his knowledge of human blood circulation, he was the first to model the economy as a circular flow.
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$15 The System of Income Accounts
the analysis of circular flows
national income accounting
the economy is partitioned functionally and not personally.
A person does not belong to one of the two sectors pure and simple; but he belongs to the firms when producing, and to the households when consuming.
a stationary economy: total factor income = total consumption expenditure
an evolutory economy: net investment (productive equipment) := gross investment - reinvestment (old ->new)
the value of total production - Y (yield)
the value of consumption - C
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the value of Savings - S ::: households / firms ??
the value of gross investment - I (gross) ::: nation ??
Y (yield-production) := C (consumption) + Investment (gross)
(the total value of commodities produced)Y := C + I (gross)
(the sum of all factor incomes)Y := C + S
C = f (Y)
If income increases, consumption also increases BUT not as quickly as income.
S = f (Y)
If income increases, savings also increase BUT at the higher rate than income.
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$16 Notions of Income in the System of Income Accounts
In comtemporary discussion, both theoretical and political, "aggregate income" is of outstanding significance: it serves as a "buines barometer"; it is the strategic variable of growth policy; and it is even employed as a "welfare indicator". THis overwhelming importance of "aggregate income" necessitates that it be determined empirically; and this constitutes a further duty of income accounting.
The net national product at factor cost is often referred to as national income because
- it does not include depreciation;
- it refers to the income of nationals; and
- it does not include indirect taxes (minus subsidies).
Yet, the habitual indicator of a country's economic strength is the gross national product at market prices.
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Net and gross product
gross == total, net == gross - depreciation (or reinvestment)
net product comprises only that fraction of it which is available for consumption or net investment
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Domestic and national product
This distinction makes allowance for the economy's foreign relationships. the profits of a US firm's foreign branch in Germany belong to the US national product, but not to the US domestic product. Conversely, they belong to Germany's domestic product, but not to her national product
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Products and market prices and at factor cost
These two differ by the amount of indirect taxes and subsidies. The product at factor cost represents the value of output as measured by the total costs incurred in its production. Adding indirect taxes and deducing subsidies from this yields the product at market prices.
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Nominal and real product
any value increment is capable of being split up into an increment in output, and an increment in prices.
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There are three different ways to calculate aggregate products GDP
add the values of all commodities produced; the commodity-service method
the sum of all expenditures; the consumption-plus-investment method
total all factor incomes; the incomes received method, respectively.
According to the consumption-plus-investment method
GNP = C + I + G + net export
The income-received method describes how national income is distributed among employees, and entrepreneurs and property-owners.
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