Suppose we extend the circular flow model to add imports and exports. Copy the circular flow dia

step 1 Once again, welcome to a new problem. This is economics, and whenever you model flow models, or

Suppose we extend the circular flow model to add imports and...

Key Concepts

Circular Flow Model

The Circular Flow Model is a fundamental economic framework that illustrates the movement of goods, services, and resources between different sectors of an economy, primarily households and firms. It shows how money and outputs circulate through the economy by representing interactions such as consumption, production, and factor payments in a simplified diagrammatic form.

Open Economy

An Open Economy is one that engages in international trade and financial exchanges with other countries. By including foreign agents in the economic model, it extends the traditional circular flow model to accommodate the flows of goods, services, and payments between the domestic economy and the rest of the world, illustrating how external factors influence domestic economic activity.

Imports

Imports refer to the goods and services purchased by a country from abroad. In an open economy, imports represent an outflow of money from the domestic economy to foreign producers in exchange for these goods and services, impacting the domestic balance of trade and overall economic activity.

Exports

Exports are the goods and services produced domestically and sold abroad. They contribute to the inflow of foreign currency into the domestic economy, acting as a key component of a nation’s income and influencing the net export balance as part of international trade.

Flow of Payments

The Flow of Payments concept highlights the monetary transactions that occur in exchange for goods and services, especially in international trade. In the context of importing and exporting, the flow of payments involves transfers of money that match the value of traded goods and services, ensuring that financial exchanges are accounted for between domestic and foreign sectors.

Transcript

00:01 Once again, welcome to a new problem.

00:04 This is economics, and whenever you model flow models, or you could call them like flowchats, whenever you model flowchats, what happens is you're showing how inputs and exports are related to stakeholders, us in say a macroeconomic system.

00:45 Remember macroeconomics means that you're dealing with whole economic systems, whole economies, and that includes local economies and international economies or foreign economies.

01:00 So in this particular problem, in this particular problem, our main focus is going to be or visually describing, visually describing, the flow model that explains the movement of imports and exports reports related to countries, say like the us, for example, relative to other countries, say like mexico, or canada.

02:12 These are foreign external countries that have extensive trade relations with the us so that means the macroeconomic policies are intertwined with each other and therefore they exchange imports and exports.

02:31 Imports being the goods and services or the goods coming into a country and exports meaning the goods going outside a country.

02:49 So they're being being sold outside a country.

02:51 As an example, you could say that the us imports pork products, or rather not pork products, china imports pork products from the us, and then the us exports, say for example technological products to china or parts that are assembled in china.

03:19 So that's the problem here we want to show the imports, we want to show the imports, we want to show the exports, and we also want to show the imports and not just the imports and the exports, also the payments, the payments that these imports and exports bring.

03:46 So we can say that the, in an open economy in an open economy, we have different sectors.

03:58 And these sectors include households.

04:02 So households can be family members or non -family members, but they have to be living together.

04:08 You could have farms or businesses.

04:11 There's also the government is involved in facilitating the relationships between these other sectors in terms of law and order, protection, taxation, and stuff like that.

04:24 And then also another sector that can come in is the foreign sector, the foreign sector in the form of a foreign country, in the form of a foreign country.

04:36 So you could have a foreign sector in the form of a foreign country.

04:40 So we're going to have a flow diagram and let's see we have the main players in the particular problem.

04:48 The foreign country obviously is a main player and then the government is like a midwife, you know, like say a foreign country like china or canada, or say the mexico, for example, and then you have the u .s.

05:10 Government midwifing the relationship or the relationships between these different sectors.

05:18 So we also have financial markets, financial markets play a huge role in the relationships of the exchange of goods and services.

05:31 So we have financial markets here.

05:34 This is going to be our financial markets.

05:36 So now we want to see how these ones play out.

05:40 We do have households.

05:45 We also do have households on one extreme and then on the other extreme we have the businesses involved or the farms involves.

05:58 So this is what you have right here.

06:01 This is what you have right here.

06:03 So we want to start with the households and see how they play out.

06:08 So the households borrow from the financial markets.

06:16 The households borrow from the financial markets.

06:19 And then through the boring, they have other relationships.

06:29 For example, they also save through banks in the financial markets or banking institutions.

06:40 These households have to consume goods and services, so they have an expenditure relationship with the farms or businesses.

06:51 So this is consumption expenditure.

07:02 And then you also have households which invest in businesses and therefore it could happen that they're going to receive payments from these businesses.

07:15 So we call these factor payments.

07:18 So they get factor payments from these businesses.

07:22 Remember, businesses are also like individuals, so they're going to save into the financial markets like the banking sector, but then also they do borrow, the businesses borrow from the financial markets.

07:41 The government has a role to play in the financial market, and the government can also save in the financial market.

07:52 Financial markets so the government can also save in the financial markets so these are savings and and the same government can also borrow same government can also borrow so borrowing from the financial markets so we're saying that the government has relationships with the households through tax payments so the households pay taxes to the government through when they consume goods and services or employment but also the government can make payments to households like social security payments health care payments and things of that nature for example the government can pay people for unemployment so these are payments transferred from the government to the health care, households and eventually this relationship produces what we call net transfer payments...

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