The circular flow means the unending flow of production of goods and services, income, and expenditure in an economy. It shows the redistribution of income in a circular manner between the production unit and households. Discuss in detail the markets within the FOUR-SECTOR model (Circular Flow)
Discuss in detail the markets within the FOUR-SECTOR model (Circular Flow)
INTRODUCTION
The economy of a country is regarded as an open economy because of the presence of households, producers, government, foreign sector and financial
sector as active participants in the economy. Markets link the participants in the economy 🗸🗸 [Max 2]
BODY: MAIN PART
PRODUCT / GOODS/ OUTPUT MARKET🗸
- These are the markets for consumer goods and services🗸🗸
- Goods are defined as tangible items, like food, clothes, cars, etc. that satisfies some human wants or needs🗸🗸
- Buying and selling of goods that are produced in markets e.g. 🗸🗸
- Capital Goods market for trading of buildings and machinery🗸🗸
- Consumer goods market for trading of durable consumer goods, semi-durable consumer goods and non-durable consumer goods. 🗸🗸
- Services are defined as non-tangible actions and include wholesale and retail, transport and financial markets. 🗸🗸
FACTOR / RESOURCE/ INPUT MARKETS🗸
- Households sell factors of production on the markets: rent for natural resources, wages for labour interest for capital and profit for entrepreneurship🗸🗸
- The factor market includes the labour, property and financial markets. 🗸🗸
- The market where services of factors of production are traded e.g. labour is hired and capital is borrowed – these services earn wages, interest, rent and profits🗸🗸
FINANCIAL MARKETS🗸
- They are not directly involved in the production of good and services, but act as a link between households , the business sector and other participants with surplus finds🗸🗸
- E.g. banks, insurance companies and pension funds🗸
MONEY MARKETS🗸
- In the money markets short term loans, and very short term funds are saved and borrowed by consumers and business enterprises 🗸🗸
- Products sold in the market are bank debentures, treasury bills and government bonds 🗸🗸
- The simplest form exists when parties make demand and short-term deposits and borrow on short term 🗸🗸
- The SARB is the key institution in the money market🗸🗸
CAPITAL MARKETS🗸
- In the capital markets long term funds are borrowed and saved by consumers and the business sector🗸🗸
- The Johannesburg Security Exchange (JSE) is a key institution in the capital 🗸🗸
- Products sold in this market are mortgage bonds and shares🗸🗸
FOREIGN EXCHANGE MARKETS🗸
- On the foreign exchange markets businesses buy/ sell foreign currency to pay for imported goods and services🗸🗸
- These transactions occur in banks and consists of electronic money transfers from one account to another🗸🗸
- The leading centres/ most important foreign exchange markets are in London, New York and Tokyo 🗸🗸
- e.g. traveller’s cheques to travel abroad🗸
FLOWS🗸
- Flows of private and public goods and services are real flows and they are accompanied by counter flows of expenditure and taxes on the product market🗸🗸
- Factor services are real flows and they are accompanied by counter flows of income on the factor market🗸🗸
- Imports and exports are real flows and are accompanied by counter flows of expenditure and revenue on the foreign exchange market🗸🗸[Max 26]
BODY: ADDITIONAL PART
- A change in investment of R 10m will result in a change in income of R 20m🗸🗸
- An increase in investment causes the expenditure function to shift upwards from C1 to C2 so that C1 is parallel to C2🗸🗸
- The effect of the increase in investment is that the total expenditure will increase from R 20m to R 30m🗸🗸
- The increase in the value of output (Y) is greater than the increase in the expenditure (E) 🗸🗸
(Explanation must comply with the figures supplied in the graphical presentation)
[Max 4]
[Max 10]
CONCLUSION
The circular flow ensures continued interdependence and coordination of the economic activities in the economy / markets are critically important institutions in our economic system, because they regulate the supply and demand and safeguard price stability and general business confidence. 🗸🗸
[Any other relevant conclusion]
[Max 2]