The Interdependence Between the Major Sectors, Markets

Chapter 3

THE INTERDEPENDENCE

BETWEEN THE MAJOR

SECTORS, MARKETS AND

FLOWS IN THE MIXED

ECONOMY

Major Sectors

• Major Sectors in a mixed economy:

– Households: sellers in the factor markets,

buyers in the goods market; determine what

should be produced

– Firms: buyers in the factor markets; sellers in

the goods market; determine how to produce

– Government: buyer in the factor & goods

markets; taxes; transfer payments

– Foreign sector: open economy; BP; X; Z

Chapter 3 The interdependence between the major sectors, markets and flows in the mixed economy

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Chapter 3 The interdependence between the major sectors, markets and flows in the mixed economy

© Van Schaik Publishers3

Box 3-3

The Public Sector in South Africa

Major Markets

• A Market is any communication between

potential buyers and potential sellers of a

good or service.

• Goods markets

• Factor markets:

– Labour markets

– Capital goods markets

Chapter 3 The interdependence between the major sectors, markets and flows in the mixed economy

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Major Flows

• A flow is the rate of change of a stock. A

stock is measured at a point in time,

whereas a flow is measured over a period.

• Major flows:

– PRODUCTION uses factors of production

– Factors of production earn INCOME

– INCOME is SPEND on goods & services

Chapter 3 The interdependence between the major sectors, markets and flows in the mixed economy

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Chapter 3 The interdependence between the major sectors, markets and flows in the mixed economy

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Figure 3-1 The three major flows in the economy

Chapter 3 The interdependence between the major sectors, markets and flows in the mixed economy

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Figure 3-2 The circular flow of goods and services

Chapter 3 The interdependence between the major sectors, markets and flows in the mixed economy

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Figure 3-3 The circular flow of income and

spending

Interdependence between Households,

Firms, Government & Foreign sector

In order to understand the interdependence,

one needs to distinguish between:

- Monetary flow & flow of goods & services

- Addition or Injection & leakage or

withdrawal

Chapter 3 The interdependence between the major sectors, markets and flows in the mixed economy

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Chapter 3 The interdependence between the major sectors, markets and flows in the mixed economy

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Figure 3-4 The government in the circular flow of

production, income and spending

Chapter 3 The interdependence between the major sectors, markets and flows in the mixed economy

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Figure 3-5 The foreign sector in the circular flow of

income and spending

Chapter 3 The interdependence between the major sectors, markets and flows in the mixed economy

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Figure 3-6 Financial institutions in the circular flow

of income and spending

Chapter 3 The interdependence between the major sectors, markets and flows in the mixed economy

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Figure 3-7 The major elements of the circular flow

of income and spending