Will Form 2220 Circular 2023-2024

In macroeconomics, we study the economy of one country, then try to understand how two countries interact and trade, and hopefully understand the global economy. So today, we are going to study the circular flow of income. Let's make things real as a poll, imagine we're alone on an isolated island. There's no government, no trade, no savings. I told you it's simple, let's only have firms and households. Firms produce goods and services out of thin air, but firms need factors of production from households, such as labor, land, or capital. Some of us in households are going to be entrepreneurs, providing entrepreneurship for free. But we don't get freebies from firms, we don't provide labor for free either. So money flows in the opposite direction, households have to pay firms. Very good! Firms also have to pay households in the form of wages, rents, and profits. But this is a little year, we don't spend everything we earn in real life. So let's add savings as money we don't spend, money flowing out. Hey, savings don't just sit in banks and funds, by lending to them, funds need money to buy capital equipment or cover other costs of production. So that's investments flowing into the economy. Bravo, awesome! But this is a little too simplified, so let's add government. Government gets money from taxes, so there's money flowing in. Government spending comes from taxes, so that's money flowing out, because it's money we are paying as taxes and we cannot spend it. Lastly, countries interact with one another. Imagine this is an American economy, let's add trade. America imports stuff, for example, America can import shoes from China. Shoes flow from China into America, and money spent on imports flows out of America into China. America exports too, America can...