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MARGINAL UTILITY-PRICE RATIO: The ratio of the marginal utility obtained from consuming a good to the price of the good. This ratio is particular important in determining consumer equilibrium, which is reached when the marginal utility-price ratios are the same for all goods.

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Lesson 11: Circular Flow | Unit 3: Government Page: 13 of 22

Topic: Government Purchases <=PAGE BACK | PAGE NEXT=>

Government spending is divided into government purchases of GDP and transfer payments.
  • Transfer payments include welfare to the poor, unemployment compensation, and Social Security benefits.
  • Transfer payments are like negative taxes, but flow from the government sector to the household sector.
  • The circular tax flow is the net tax flow from households to government, taxes minus transfer payments.
  • Government purchases are the green flow from the government sector to the product markets.
  • As an expenditure on GDP, government purchases are comparable to consumption by the household sector and investment by the business sector.

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THREE-SECTOR, THREE-MARKET CIRCULAR FLOW

A circular flow model of the macroeconomy containing three sectors (business, household, and government) and three markets (product, factor, and financial) that illustrates the continuous movement of the payments for goods and services between producers and consumers, with particular emphasis on taxes and government purchases. Other circular models are two-sector, two-market circular flow; two-sector, three-market circular flow; and four-sector, three-market circular flow.

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Today, you are likely to spend a great deal of time flipping through the yellow pages seeking to buy either a rotisserie oven that can also toast bread or a flower arrangement in a coffee cup for your father. Be on the lookout for neighborhood pets, especially belligerent parrots.
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Parker Brothers, the folks who produce the Monopoly board game, prints more Monopoly money each year than real currency printed by the U.S. government.
"There is no passion to be found playing small in settling for a life that idles than the one you are capable of living."

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