economic circuit
Scheme of economic relations between economic agents. Expressing the
economic activity, it allows to determine the amounts of production and income,
evaluate the efficiency of an economy and account for the various contributions
by economic operators for production, consumption, and to know the
distribution of income among different economic agents..
The scheme allows us to identify the different types of flows established between
economic agents:
• Actual flows: goods and services circulate between economic
agents;
• cash flows: means of payment (currency, checks, transfer orders,
etc.) circulate.
Considering all economic actors in an open economy with cash flows, economic
activity can be outlined as follows:
In the economic circuit we can identify, the flows that represent the resources of
the economy and how they are used - uses. The value in Euro of resources and
jobs allows us to discover, by country, the value of production (GDP and GNP),
the income of the country (national income) and in terms of jobs, domestic
demand, global demand and the expense (domestic expenditure and national
expenditure).
The analysis of economic activity focuses on understanding the behaviour of
economic agents and the activities that they develop in order to have an overall
view of the entire economy, particularly on its operation and the effect of
economic policy measures.
Monopoly
Keynesian model
Important model in macroeconomic analysis whose main characteristic is the role of
the state and its fiscal policy (taxes and public spending) in determining the product
and income level. The Keynesian theory was developed due to the depression from
1929 to 1933 and currently still applies.
In this model that considered the state's activity, the use of the multiplier allows us
to answer the following questions: What is the impact on income (Y) if the public
consumption (G) increases? What is the impact on income (Y) if the internal
transfers (TR) increase? What is the impact on income (Y) if the taxes decrease (T)?
Consider the model:
Y=D
D= Y=C+G+I
Yd= Y +TR-T
C= a +bYd
T= T +tY
TR= TR
I= I
G= G
The variables G, I, T e TR are exogenous and taxes vary directly with income level.
T is the value of the taxes which are independent of the factors considered in the
model e t the marginal tax rate. The marginal tax rate is less than 1 and greater
than zero.
With the introduction of the state on the model, consumption and savings depend
not from yield (Y) but from disposable income (Yd).
The endogenous variables are the yield (Y), disposable income (Yd), taxes (T),
consumption (C) and savings (S).
With the above equations we can solve the model in order to Y:
Y= a +bYd + I + G
Y= a +b(Y- T + TR )+ I + G
Y= a +b(Y- T -tY+ TR )+ I + G
Y-bY + btY = a –b T +b TR + I + G
Y
a  bT  bTR  I  G
1  b(1  t )
The transfers are exogenous in the model. In the case of being endogenous we would
have: TR = TR + zY where z was the marginal rate of transfers
Y
a  bT  bTR  I  G
1  b(1  t )  bz
Based on the above formula we can calculate the multiplier.
Public deficit (or budgetary deficit)
It corresponds to the negative balance of public accounts, that is, the difference
between government spending and its revenues for a certain period of time
(usually a period of one year), when public expenditures are higher. Generally,
the government deficit is presented as a function of GDP in order to provide
comparisons between countries of different sizes and to assess excess
government expenditure in relation to the total wealth produced in the same
country. 934170770
Example: Exam Economics - 11th grade
•• total public revenue, in nominal terms, decreased from € 76,934 million in
2011 to € 67,794 million in 2012, corresponding to an annual growth rate of 11,9%;
•• total public expenditure in nominal terms, decreased from € 84,477 million
in 2011 to €78,390 million in 2012, corresponding to an annual growth rate of
-7.2%;
•• GDP in nominal terms, decreased from €171 065 million in 2011 to € 165
409 million in 2012, corresponding to an annual growth rate of -3.3%;
•• there was a rise of the budget deficit as a percentage of GDP, which is
explained by the worsening of the budget deficit, in absolute terms. This is due
to the fact that the decrease in the value of total public expenditure is less than
the reduction seen in the total public revenues. On the other hand, by the fall of
the GDP;
•• in Portugal, the budget deficit as a percentage of GDP, increased from 4.4%
in 2011 to 6.4% in 2012; this trend was against the one verified in 17 Member
States of the Euro zone, where the budget deficit as a percentage of GDP,
decreased from 4.2% to 3.7%.
Income Elasticity
The income elasticity of demand measures the demanded quantity degree of
sensitivity face to changes in income and its value depends on the type of good:
Example 2: Consider that the demanded quantity of radar components is given
by
P  100  2Q d
And the following situations:

The price demand elasticity is in the equilibrium point;

If the user income increases by 40% and demand-income
elasticity is equal to 2, what is the effect over demanded
quantities;
Direct Demand Elasticity Price:
Q
P
1  x  x
Px Qx
'

P
75

 1   50   
2  12,5

  1  2   1   2



1
2
1   0    6

1  
6
3
 1  2
It is a good of elastic demand.
Elasticity Demand-Income:
r 
Qx R x

R x Qx
2
Q x
40%
 Qx  2 40% 
Qx  80%
If the consumer's income increases by 40%, with a demand-yield elasticity of 2,
the quantities demanded will increase by 80%.
Solow model
neoclassical growth model, which explains the role of capital and other productive
factors accumulation, for economic growth. In this model, the economy tends
toward a steady state in which the fundamental variables evolve at constant rates.
Why some countries prosper while others do not? Robert Solow in the 1950s
analyzes this issue and highlights the dynamics of capital accumulation and the role
of technological progress as the driving force of economic growth. In the 1980s,
Robert Lucas and Paul Romer continue the work of Solow
Features of the production function:
•
•

The production factors are perfectly divisible
The marginal productivity of productive factors (K, L) are positive but decreasing (Pmg
K> 0 and MPL> 0).
With constant returns to scale. Thus the production function in its intensive form will
be:
Y =F(K,L)
If :
We have the final expression:
y= f(k)
the production function in intensive form establishes a direct relationship between
per capita product (y) and the per capita capital (k)
The Solow growth process can be analyzed with demographic growth or not.
 Solow model without population growth
The behaviour of the capital and labor ratio (k) over time k is obtained by deriving:
As L  n  0 , then:
L
If we determine the per capita values we will have:

The Solow model is in a steady-state equilibrium when the per capita savings is
equal to the depreciation of the per capita capital and