THE NATIONAL AND INTERNATIONAL ECON0MY
The output of an economy has a significant influence on its inhabitants’ living standards. The higher the output the more goods and services people can enjoy. The level of output is influenced by the total level of demand for the country’s goods and services. Some of the demand will come from foreign countries just as some of the goods and services produced will be sold to other countries.
THE CIRCULAR FLOW OF INCOME:-
The circular flow of income illustrates how the macro economy works. It shows how output generates income which is then spent and it shows the relationship between households, the government and the foreign trade sector
A TWO SECTOR MODEL:-
A simple model of the economy in which there are only two sectors, firms and households, is illustrated in Figure 26. I.
Firms are the producing units which hire services provided by the people from the households. For these services firms pay wages (for labor), rent (for land), interest and dividends (for the services of capital).There is therefore, a flow of factor services from households to firms and a flow of income from firms to households. These flows are represented by the upper arrows in Figure 26.1.
In this model, households are also the purchasers of the national output. There is a flow of spending from households to firms and a flow of goods and services from firms to households. These flows are represented by the lower arrows in Figure 26.1 .The costs of production represent the incomes paid to households.
LEAKAGES AND INJECTIONS:-
The simple model is very unrealistic because even in the simplest economy all the income received by households is not spent some of it is saved. Saving represents a leakage ( ...