Circular flow of income model
Circular flow of income modelThe circular flow of income model demonstrates the important relationships between sectors in the Australian economy. It can also be useful for understanding and explaining current conditions of these sections. It is a useful tool in evaluating the government budget and areas of spending to keep the economy stable.
The circular flow of income model is made up of five sectors. These include the
household, firms, finance, government, and external sectors. Each of these sectors has a vital and realistic role to play. The household secotr comprises of basic consuming units in society, but it is also the source of supply of the specialised labour force which is required by the firms sector. The business sector comprises of basic productive units in the economy, most production of goods and services is in the hands of private firms motivated by the desire to maximise their profits. The financial sector comprises mainly banks and the centeral bank which are responsible for issueing notes and coins, controlling the supply of money, and providing day-to-day requirements of the community. The government sector fits into the circular flow as a receiber and spender of income. It providescollective goods and services, such as defence, schools, hospitals and flood mitagation programs.The final sector of the circular flow model is the foreign sector. The foreign sector represents another set of leakages and injections in the circular flow and, therefore, another opportunity for loss of equilibrium.
The current state of the household sector is in a slight slump. The household sector is reluctant to buy goods at the cirrent point in time. The income they are recieving is lower than what it has been, which would explain the drop in consumption. There has also been a noticable drop in the amount the sector has been saving. I have based my annalysis for this sector on comments from The Economic Rag stating "National savings levels dropping slightly, possible as a result of the reduction of income levels", and "the recent drop in production levels for both export and domesticaly consumed items". These statements imply that there has been less demand for products by stating that there is a recent drop in production levels.
The business or production sector is in a small slump at the present time. The production of business' has been low due to the decrease ing demand from the household sector. This is brought about from a decrease in wages by the business sector. But this sectors confidence remains solid despite the recent drop in production. My annalysis of this sector was based on the comments in The Economic Rag stating "Business confidence remains solid despite the recent drop in production levels" and on my understanding and annalysis of the household and business sector.
The finance sector at present is quite stable. It might be slighty effected though the decrease in in savings from the household sector. But i think this will be cancelled out by the icrease of building approvals which will have an effect on the number of homeloans. Which will inturn increase the amount the amount of interest received. My annalysis of this sector was determined from the statements from the Wenkster Mail stating "there has been an increase in home building approvals", and the comments in the Economic Rag stating "national saving levels dropping slightly".
The current state of the government sector is in a moderately bad state. They have currently outlayed more money than they have received in revenue. The government will not receive as much money in income taxes this year. There will also be a decrease in of revenue received from producing, selling and purchasing if goods if the current economic trend contnues. This is becuase there has been a decrease in purchases of goods due to a decrease of income. The government will also have to outlay more money for unemployed wellfair. My annalysis for this section was based on the Unemployment Rate graph in the stimulus, the comments in The Economic Rag and The Wenkster Mail, and the information on Commonwealth Budgets in the stimulus.
The foreign sector is in a slightly bad state. The foreign sector is importing more than it is exporting. I beleive that this will continue. But with consumption going down in Australia I beleive that the difference between our imports and exports will greatly decrease. My annalysis of this sector was determined by the information on Current Account (Exports and Imports) 1998-99.
The proposed government budget for 1999-2000, In my opinionis not very appropriate for the current economic situation. I beleive the government should boost spending to give the household and business sectors a "kick into gear". By spending more money it would increase the production in the business sector, which would increase spending and saving. This would boost the finance sector and the government sector. Overall the proposed government budget is not very good for the current economy of Australia. I beleive that if they were to outlay more money, the nations economy would grow and prosper.
The circualr flow of income model is a usefull tool in studying the economy, and sectors of that economy. It also helps to understand where money goes when it is spent or saved, and why the role of every sector is so important.