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GOVERNMENT BORROWING: The demand for loans obtained through the financial markets by the government sector to finance government purchases over and above taxes. In terms of the circular flow, this is one of two demands for household saving diverted into financial markets, the other is investment borrowing.

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Lesson 2: Economic Science | Unit 2: Theory Page: 6 of 20

Topic: Abstraction <=PAGE BACK | PAGE NEXT=>

Economic theories are abstractions of the real world.

Three ways to abstract:
  • Words. The earliest human method of abstraction was to represent objects with words. Words also represent ideas. But words can have different meanings.
  • Graphs. Pictures, especially graphical pictures. Many economic theories are abstractly represented with graphs. A picture or graph can be less confusing that words.
  • Equations. Graphs are two-dimensional pictures of mathematical equations. Economic theories are often abstractly represented by equations. Equations can represent relationships between three or more things, like that for X, Y and Z:
Y = 3 + 2X - 4Z

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INCOME RECEIVED BUT NOT EARNED

The three types of income received but not earned (IRBNE) are Social Security payments, unemployment compensation payments, and welfare payments. These are three key transfer payments from the government sector to the household sector. The basic goal of transfer payments is to transfer a portion of the income earned by the factors of production (because they HAVE income) to other members of the household sector (who presumably NEED more income than they have). IRBNE is added to national income to derive personal income.

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Today, you are likely to spend a great deal of time at an auction wanting to buy either a coffee cup commemorating the 1960 Presidential election or a how-to book on fixing your computer, with illustrations. Be on the lookout for telephone calls from former employers.
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Two and a half gallons of oil are needed to produce one automobile tire.
"Plans are only good intentions unless they immediately degenerate into hard work."

-- Peter Drucker, management consultant

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