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Circular Flow of Income. How the different components of an economy interact.

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Transcript: 1 In macroeconomics, we study the economy of one country. 2 Then try to understand how 2 countries interact and trade. 3 And hopefully, understand the global economy. 4 So today, we are going to study the circular flow of income. 5 Let’s make things really simple. 5 Imagine we are alone on an isolated island. There’s no government, no trade, no savings. I told you, it's simple! 6 There’s only firms and households. (2-sector economy: firms + households (closed economy)) 7 Firms provide households with goods and services. 7 Out of thin air? 7 Nah.. 8 Firms gotta get factors of production from households. 8 It can be labor, land, capital or… 8 Face it. Some of us in households are going to be entrepreneurs. (For more information on factors of production: check out this video) 8 So…entrepreneurship. 9 For free? You wish! 9 We don’t get freebies from firms. 9 We don’t provide labor for free either. 10 So there’s money flowing in the opposite direction. 11 Households gotta pay firms for the goods they get. 12 Firms also gotta pay households in the form of wages, rents, interests or profits. 12 But this is a little weird. 12 We don’t spend everything we earn in real life. 13 So let’s add savings. 13 Savings is money we don’t spend. 13 So there’s money flowing out. 14 Hey, savings don’t just sit in banks… 14 Banks invest in firms by lending to them. 14 Cos firms need money to buy capital equipment or cover other costs of production. 14 So there's investments flowing into the economy. 14 Bravo! Awesome! 14 But this is a little too simplified. 15 Let’s add government. (3 sector economy: firms + households + government) 15 Government buys stuff as well. 15 So there’s money flowing in. 16 Government gets money from taxes. 16 Taxes. So there’s money flowing out. 16 Cos for the money we’re paying as taxes, we cannoyt spend it. 17 Lastly, countries interact with one another. 17 Imagine this is an American economy. 18 Let’s add trade. (4 sector economy: firms + households + government + foreign sector) 18 America imports stuff. 18 For example, America can import shoes from China. 18 Shoes flow from China into America. 19 And money spent on imports flows out of America into China. 19 America exports too. 19 America can produce software 19 and export it to foreigners, 20 Money then flows from foreign countries into America. 20 This is America's export earnings. 21 Investments, Government Spending and Export earnings are called Injections. 21 Cos money is flowing in. 22 Savings, taxes and import spending are called leakages or withdrawals. 22 Cos money leaks out of the system. And hey, injections and leakages are sort of related. Investments come from savings. Government spending comes from taxes. America makes money from foreigners by exporting. But foreigners also make money from America when America imports. Wow…no wonder it's Circular Flow of Income It tells us roughly how an economy functions. 23 How do we measure the size of an economy then? 24 By measuring Gross Domestic Product or GDP. 24 GDP is the total value of all final goods and services produced within the borders of a country during a given period. 25 Why must it be FINAL goods and services? (Hint: it's in the next video) 26 If you like this video, remember to like and subscribe. 27 Next up: Measuring GDP: Output Approach _______________________________________________ How does an economy function? Look at the Circular Flow of Income. Who are the major players in an economy? In order of increasing complexity, there are: 2-sector economy: households + firms 3-sector economy: households + firms + government 4-sector economy: households + firms + government + foreign sector There are real goods and services flowing in one direction in the circular flow of income and money flowing in the opposite direction. When money flowing to the country, it's called injections. When money flows out, it's called withdrawals or leakages. Injections consist of government spending, investments and exports. Leakages or withdrawals include imports, taxes and savings. Injections and leakages/withdrawals are related to each other. This is because government spending comes from tax revenues and investments, at least the local component, come from savings. That said, investments can flow from foreign countries in the form of foreign direct investments (FDI). Lastly, while money can flow from foreign countries when we export overseas, money also leaks out of the country because we import. Important definitions: Gross Domestic Product or GDP is the total value of all final goods and services produced within the borders of a country during a given period. Use flashcards to remember these definitions in economics: http://www.memrise.com/course/461808/economics-101/
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Text Comments (104)
Daniel Roberts (8 days ago)
Any one els got a test
Vukera Magumbo (1 month ago)
Excellent presentation,thank you
Neo Sanhans (1 month ago)
You are better than my teacher
Abdulkadir Sharrif (1 month ago)
You are funny and you know how to teach others
Wasib Islam Nik (1 month ago)
wow, I got the whole idea.thank you Miss ,thanks a lot
Ash Kerr (1 month ago)
If we are alone on an isolated island then how come there are firms and households
Ârbaaž Šhaikĥ (2 months ago)
In a debit base economy if it true that bank create money out of thin air.if not how is the flow of money rising exponentially
Jhanvi Bhatt (2 months ago)
This is the best explanation compared to all on injections and leakages
Nadiya Karalash (2 months ago)
This is good stuff. Thank you, subscribed.
Vikas Kumar (2 months ago)
Grace Rose (2 months ago)
How do households give businesses land?
Susmoy Roy (2 months ago)
Awesome... 👍👍👍
You Found Me :O (2 months ago)
I’m a little confused. So if you make $5 a month from a company and you pay the company $5 dollar for food, then no one is making any money. If you pay less than $5, the company wouldn’t be able to pay your $5 monthly income.
You Found Me :O (1 month ago)
pr chandran thanks for answering
pr chandran (1 month ago)
See that's a flawed assumption because savings and taxation aren't being accounted for. The two sector flow of income without savings is merely a hypothetical scenario to help understand the other types
I U (3 months ago)
Naise 💟
Eswari Madasamy (3 months ago)
too easy for me thank you
Mellissa ngwenya (4 months ago)
so helpful i really understood the circular flow of income
ACN (4 months ago)
Greetings from Turkey
Shreyas Bhalerao (4 months ago)
totally awesome..
Lets see (4 months ago)
( CORRECT IT ) . first house hold send labour , land capital TO firm and in return house hold receive rent , intrest , wages . and firm produce goods and services hence house hold purchse goods and services and pay for it . simple
Shafraz Ahmed (5 months ago)
Awesome explanation.... (Y) <3
hamza iqbal (5 months ago)
Charanjeet Ray (7 months ago)
Why did I used to hate circular flow?it's so effing easy.
Lokesh C (8 months ago)
Amazing mam u made it osm,😍😍😍😍
Ramu Ramraj (9 months ago)
Ramraj,,,,Meet you
Shreya Jain (9 months ago)
Most simple video ever. Made all concepts clear. Bravo!
Keith Alvares (10 months ago)
thank you so much for this amazing video
Nancy Nagi (11 months ago)
well explained
Alfiya Sakharkar (11 months ago)
Thank you so much You just saved my last moment semester studies 😭
Samuel Preston (1 year ago)
Thank you so much
vevo world (1 year ago)
thank u soo , much its simple to understand, and your accent, i love😍😍😍😍
David Ramirez (1 year ago)
great explanation! i wish my teacher explained it like this
Cristian Corjan (1 year ago)
2:35, WTF is this weird voice???
Vrishali Bhatt (1 year ago)
Thank you..it was so helpful
Aradhna Akansha (1 year ago)
aloke bachhar (1 year ago)
Amazing explanation
Mark Jefferson David (1 year ago)
retro love (1 year ago)
thank you so much ....love from india ....really helping video for me
Pamela K. Mwaba (1 year ago)
simple and straight forward, bravo. i can feel myself already passing my exams. thanks
sidhu baba (1 year ago)
amazing ...uderstood whole 50 minutes lectures.in this one five minute video...wow!!
Arun Soni (1 year ago)
Soo good.. Thanks
Ak Ansari (1 year ago)
Thanks for such a fantastic video its really easy to understand...
Wini Mini (1 year ago)
are you singaporean?
Linford Gaw (1 year ago)
its exactly taken from my lecture notes in singapore poly
Prakruthi G (1 year ago)
Tq it's so simple ur explanation helped me tq:)
VIEW CENTER (1 year ago)
I just got it in few minutes thank you......
Antonio Johnson (1 year ago)
The King of Traders (1 year ago)
Carmen Chamness (1 year ago)
I like your style of humor. Thank you for the videos. :)
Crypto Currency Talk (1 year ago)
A classic Explanation.....with one of the most beautiful Voice.... Carry on.
Nazir Ahmed (1 year ago)
love u
Shanaya Shaikh (1 year ago)
amazinggg!!! explanation 😊😊😊
sheik mateen (1 year ago)
d best and easiest way of teaching...thanq u so much ...plz upload other topics related to national income
Neel Khaneja (2 years ago)
awesome awesome this type of videos are better than some teachers in high school
Shumi (2 years ago)
A M (2 years ago)
really like the use of visuals to explain this, thanks a lot :)
Samuel Hasan (2 years ago)
you sound like BMO from adventure time XD
Himmyh Himson (2 years ago)
thank you very very very much!
golu Khan (2 years ago)
Buzzer Mornin (2 years ago)
fuck your emotions
Harambe Is Here (2 years ago)
sasha lin (2 years ago)
you really make it easy to understand 😀👌👍
skullman251 (2 years ago)
Thanks for this amazing video. I understood the circular flow of income much better after watching this.
Emir Shenoda (2 years ago)
Wonderful :) It's really helpful. Thanx :)
Sashank Sa (2 years ago)
awesome ... very very helpful thanks
Christian Højberg (2 years ago)
How does Circular Flow of Income work in connection to "sharing economy"? Where households sells or rents to each other, doing business peer-to-peer (P2P). Does this hurt the system? Or is it expected in this model? Please answer :-)
Abdul Wakeel (2 years ago)
commendable! really helpful video
Azian Cheetae (2 years ago)
This is the best explanation. Thank !
Elaf Alawi (2 years ago)
Thank you, it is really helpful :)
Shahwaad Khan (2 years ago)
really help so far.. Can you make a video on exams tactics structure questions and mcqs Thanks
Vikram Mojawat (3 years ago)
You are doing really awesome!!! Im using this for my exams its so simple for explaining Keep it up!!! let me know if u need any help nd If I can
Lakshitha Peiris (3 years ago)
Bravo! awesome!
warlo lacambra (3 years ago)
Damn. you are veeeeery good thanks for explaining it properly. iloveyou HAHAHA. <3
Ala Mohsen (3 years ago)
I have been watching other videos on similar topics but I gotta say, you guys are the best. Thanks!
Andrew Week (3 years ago)
Great !
The Man in India (3 years ago)
Transparent explanation. Thanks queen of CFI.
Lucinda Mabinza (3 years ago)
This is the best illustration ever! THANK YOU so much for this. Clear and simple. 100s!
BLESSING VICTOR (3 years ago)
very nice....i liked it clear and simple
Jana Sch (3 years ago)
YOU ARE KING !!!!!!!!!! #sotrue
TSP (2 years ago)
+Economics Mafia Even though the narrator sounded like a female
Economics Mafia (3 years ago)
+Jana Schnitzler haha...what a loud exclamation!
Conor Militz (3 years ago)
Great video! You explain so clearly, thanks!
Harman Singh (3 years ago)
Your teaching style is brilliant! keep it up
Zhandos Adetbekov (3 years ago)
Thanks for the subtitles! They are important as well.
Muhammad Fareez Yusran (3 years ago)
Short, yet compact and understandable. Good to be watched when having test or finals. I surely will recommend your channel to my friends. :D
Sam87 (3 years ago)
Thanks for the explanation. always struggled when it comes to economics at Uni, but you've made it so much easier. Hope I get a Circular flow of an Income related question in the exam tomorrow.
RINKY Ree (3 years ago)
very much helpful thank you
Thom Dang (4 years ago)
Your teaching is great! I love to watch more videos of you. I sometimes get stuck in lesson in class but I found them here. Your explanation is easy for me to catch on. Thank you very much, teacher!
Economics Mafia (4 years ago)
Thanks a lot! Are you a college student or high school student?
Asif Hussain (4 years ago)
you are incredible!!!!! please don't stop your beautiful job. please dont stop! 
Mehak Arora (4 years ago)
for me you are the best teacher ever! 
Economics Mafia (4 years ago)
yeah...email me. [email protected]
Mehak Arora (4 years ago)
can i have your ID to contact you personally i got something to discuss with you .
Mehak Arora (4 years ago)
oh it sounds like as if i found a treasure! stats is something to which everyone seeks for! and an animated video on it......you will kill iiitt!!!
Economics Mafia (4 years ago)
Thanks a lot! This is the best compliment I've received. You are too nice. I hope I keep my passion of animating for education alive. Words like yours is fuel to my passion of creating videos. Thanks a lot! Give me some ideas if you can! I'm thinking of making animation videos on popular economics books like Freakonomics and Naked Statistics. What do you think?
Bryan Whyte (4 years ago)
Thank you that was easy to understand very useful
Bryan Whyte (4 years ago)
No problem helped a lot when i was doing a assessment
Economics Mafia (4 years ago)
Thanks for ya support!
mahad abd (4 years ago)
ur too good and very underrated
Economics Mafia (4 years ago)
Thanks a lot for your feedback! I do try to cut out the big words in my script consciously. Thanks a lot for telling me that it works. I'm creating these videos without much feedback so sometimes I get kinda lost. A lot of things I do is guesswork. Your feedback is really valuable =)
mahad abd (4 years ago)
I really like ur visual animations which instantly sit in my mind and your very "Simple" way of explaining!
Economics Mafia (4 years ago)
Thanks a lot. May I know which part of my videos do you like or dislike? Cos I think there are already many Economics videos floating around, that's why I don't get many viewers. Your feedback will help me improve greatly. Thanks a lot! 

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