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Unit 2 IP - Research Paper Example

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The circular flows of income of a closed system contain the following elements; households, firms and government sectors (Arnon & Young,…
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Unit 2 IP
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Unit 2 IP

Download file to see previous pages... The model of an open system include the following components; Households, firm, government sector and foreign sector. This model may be presented in the form of an equation as shown below;
For example, if the level of exports exceeds imports by $5000 and that government purchases exceed ne taxes by $5000. For us to have a balance between the total injections and savings there must be an injection of $10,000.
The inner flow of a simple closed system consist of payments for goods and services which tend to flow anticlockwise (Arnon & Young, 2002). On the other hand, outer flow consists of flow of goods and services which tend to flow in a clockwise direction (Arnon & Young, 2002). In a simple closed economy, households spend all their income on consumer goods immediately after they receive it from their manufacturing firms (Own, 2012). On the contrary, firms sell all their outputs to consumers immediately after they have produced it. In a closed system government sector is include, there are usually three links which try to provide a link between the government and the rest of the world (Own, 2012). The first link is taxes which tend to flow from households to the government. The second link is the government purchases which flows from government to firms. The third flow may occur if government purchases exceed net taxes. Net taxes refers to the difference arrived at between transfer payments and taxes.
The inner flow in an open system includes; exports payment which flows from foreign buyers to the domestic market (Van, 2010). Additionally, if there have been fewer exports to pay for to many the goods and services imported, there will be a deficit on imports (Van, 2010). This deficit is paid by either borrowing from foreign sources or by selling financial securities to foreign economies (Van, 2010). On the other hand is the outer flow which consists of three links between the domestic economy and ...Download file to see next pagesRead More
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