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Circular Flow Of Income Between Households And Firm Economics Essay

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The United States has the most powerful, diverse, and technological advanced economy in the world. Oriented economy, private individuals, and business firms make most of th decisions. Government purchases of goods and services are made predominantly in the marketplace. US business firms have greater flexibility than their counterparts in Western Europe and Japan in decisions to expand capital plant, lay off surplus workers, and develop new products. In all economic sectors, US firms are at or near the forefront in technological advances, especially in computers, medical equipment, and aerospace, although their advantage has steadily narrowed since the end of World War 2. The excelled technology explains the gradual development of a " two - tie labor market" in which those at the bottom lack the education and professional / technical skills of those at the top and, fail to get pay raises, health insurance coverage, and other benefits.

In everyday life we experience the circular flow of income between households and firms. If we buy an item in the shop we are doing the circular flow between households and firms. It is important to us to know how the circular flow works.

National income is the total value of all factor payments during a period of time. Thenational income is a measure of the total economic flow through the factor marker. Gross national product should equal the national income. GDP is the total market value of all final goods and services produced during a given period and time within the nations borders. Gross domestic product is the most common measure of the level of economic activity at the national level.

We can control our spending and can save as much as we can if we fully understand the circular flow. In macroeconomics it stated there that the terms circular flow refers to a straightforward economic form which portrays the mutual circulation of income between manufacturer and patrons.
The circular flow - The continuous movement of production, income, and resources between producers and consumers. This flow moves through product markets, as the gross domestic product of our economy and is the revenue received by businesses in payment for this production. The flow of revenue flows to resource markets as payments by businesses for the resources employed in production. The payment received by resource owners is income. Resource owners use this income to purchase goods and services through the product markets. This flow can be altered in a number of different ways, especially by government. Taxes are sliced by income, wages, profit, etc., but are then used for expenditures by government on other things bought through the product markets. Consumers also divert a portion of their income into saving, which is then used to finance the federal deficit or business investment. For every buyer there is a seller, The seller receives what the buyer buys, The buyer gives money for goods and the seller gives goods for money.

In the circular flow model, the mutually supporting entities of manufacturer and buyer are referred to as "firms" and "households" correspondingly and supply each other with aspects in order to ease the flow of income. The households are the one who owns the factors of production (FOP) while the firms are the one who uses the factors of production such as land, labour, entrepreneurship and capital.
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By the factors of production the firms will pay the factors of income to the households. Such as in land the firm will pay rent, in labour the firm will pay wages, in entrepreneurship the firm will pay profits and in capital the firm will pay interest.
Initially household sector provides its factors of productions like land, labor, capital and organizer to the firms. And they will be rewarded by firms in different kinds. That is a labor will earn wage, capital will earn interest, organizer will earn profit and land will earn rent. After making products or output households will demand it and they pay their consumption expenditure. Here the factors of production are supplying through factor market and goods and services (output) are supplying through goods market. Similarly, households interact with government sector in two ways. Firstly, the household sector will pays taxes, which may direct or indirect taxes. Then the government may spend money in the economy for household sector in the forms like pensions, scholarships etc. Household sector interact with foreign sector in two kinds. Household sector receive transfer payments from abroad for providing their services in abroad. When the economy import something households will spend their income on imported goods. So, import is considered as a leakage from the economy.

1.1 BODY:

1.1.1 CIRCULAR FLOW BETWEEN HOUSEHOLDS AND FIRMS:

The diagram above represents the circular flow between households and firms. There are four flows in the above diagram. First, flows of factors of production (land, labour, capital, entrepreneurship) from households to firms.

As mentioned above there are four integral parts or sectors consisting in a four sector model economy. They are house hold sector, firms, government and foreign sector. Each of them are briefly explained below. Household sector : It consist of peoples or individuals. House hold sector provides factors for productions like labor, land, building, capital etc. Consumers are also listed under household sector. Firms : It refers to the various industries which providing goods and services to satisfy the demand of households. Firms are hiring the factor services supplied by households and firms rewarded them in various forms like wages for labor, rent for land and building etc. Government : It is an important part of any economy. The main function of government sector includes policy making, implementation of policies, law and order etc. The government may make fiscal policy or monetary policy. They adjust policy instruments to stabilize the economy.

Second, flow of incomes (rent, wages, interest, profit) from firms to households. Third, flow of output (goods and services) from firms to households. Fourth, flow of spending/expenditure from households to firms (the household will buy the goods and services from the firm).
Households own the economy's resources ( Factors of production; land, labor, and capital) whose services they rent or sell to firms or businesses through factor markets in exchange for factor payments (rental payments, wage payments, interest, and profits). Households use their factor income to purchase goods and services, capital goods. Households also use part of their factor income to pay government taxes.

There are two movements of funds in the circular flow income. These are "withdrawals and injections". Withdrawals will happen if there are changes of funds going out of the circular flow of income. Injections will happen if there are changes of funds going into the circular flows of income.

Foreign sector plays a vital role in an open economy. When household sector demand more, the import will increase and lead to a deficit foreign trade account. On the other hand foreign sector make payments on services provided by household sector in abroad.s Foreign sector pays on commodities exported by firms to abroad. So, it is a injection to the economy. Similarly foreign sector also pays on the service provided by firms in the form of air services, software etc. when tourists visits domestic economy, they will spend money, so it is also an inflow to the economy. Similarly government sector also interact with government. If government make any trade with foreign sector, there will be inflow or outflow of income.

The government is the reason of having withdrawals and injections in the circular flow of income.

Bellow is the diagram that shows the circular flow between households and firms with the Government's injections and withdrawals:

The diagram shows that in order to have a stable economy the government will have to do the injections (I-Investments, G-Government Expenditures, X-Export) and withdrawals (S-Savings, T-Taxation, M-Import).

To analyze an economy as a whole economists developed different models. The significance of these economic models enable us to understand the economic activities more vividly. For this purpose an economy can be classified in to four major sector. Which includes households, firms, government and foreign sector or external sector. There is a simple model which constitute two sectors, that is households and firms. Its working can be understand with the help ofcircular flow of economic activity of two sector model. Gradually the role of government considered as an important one and the government sector also included to this model. This is popularly known as the three sector model economic activity. But now the four sector model become more important, because almost all the countries are opened and they are actively participating in foreign trade (export and import). So, the four sector model representing an open economy. Here this hub very briefly explained about the interactions between these four sectors and its working.

The government will influence the circular flow in the economy. In withdrawals, for e.g. if the economy is having a maximum growth, the government will encourage the households by savings. The central bank will put a high interest so that they will cut down their spending and save their money in the bank.
Firms are producing the goods and services. For that firms are hiring factor services supplied by household sector. After the production process they will sell the output in the goods market or commodity market. So, the firm sector will receive consumption expenditure of household sector. Firms are actively interact with government. Since taxes from business sector is much important for government, it is the expenses of firms and revenue for government. Sometimes government may provide subsidies for business firms by aiming different purposes. So, subsidies are the expenses of government sector and a alms for the business firms. Business firms are very actively interact in foreign sector. The income of firms increase when they export goods and services to abroad. Similarly when theydemand capital goods, machines, raw materials etc, it will consider as an expenditure to the firms.

In injections, for e.g. if the economy is having a depression many are unemployed, the government will inject into the economy by their expenditures. The government will build some projects such as bridges, roads, schools and other building projects to make sure that they can contribute to the economy by giving jobs to the people.
Government sector interact with household sector by providing transfer payments in the form of pensions, bonus, scholarships etc. Similarly government earn both direct and indirect taxes from household sector. Government sector also earn taxes from firms from their business activities. Above all government provides many assisting support for enriching business sector like granting subsidies, price ceiling etc. Today, every government has a touch with foreigners. They also assisting by providing loans, technical assistance etc. so, there will also be the inflow or outflow of income and output.

Withdrawals: Savings (S), Taxation (T), Imports (M)

Savings - It encourages save and not spending. The household may not go shopping for unnecessary goods but spend only on necessary goods like foods and clothing.

The economic activities or interactions between these four sectors of an economy can be explain with the help of a figure as showing below.

Saving also comprises lessening expenditures, such as persisting costs. For e.g. if the person just receive her salary, she may only spend on her daily expenses and the rest will goes into her bank account.

Taxation - The government implemented tax.

In short, four sector model economy is an open economic model. Which showing a simple picture of the economy and economic activities. In a four sector model economy all the sectors are interacting with each other in many ways. So, it reduce the complexity for understanding the complicated activities.

The households will pay the tax to the government through their incomes. The government must collect taxes so that they can build hospitals, roads and give us a secure place to live in.

Imports - If the economy is having a maximum growth, households is having an abundant of resources (money) and they prefer to buy goods and services internationally than buying goods and services domestically.

In the open system, there are more flow levels to consider. An open system considers the flow of money both domestically and internationally between countries. This system includes the government, households, and businesses. The demand for imports from a foreign economy consists of goods for investment, consumption of government goods. The government however enters the factor market as well as the goods market. It enters the factor market in order to obtain domestic labor, capital, and other factors of production to provide goods and services. The government enters the goods market to purchase these goods and services such as cars, trucks, pens or pencils. After the government lends out public services to the household and businesses, the households sends labor, land and capital to businesses and receive goods and services from those businesses as they pay taxes to the government. The next level flow which is the outer flow consists of money sent from the household to the businesses for wages and rent to be paid for the household.

Injections: Investments (I), Government Expenditures (G), Exports (X)

Investments - The household income can invest in investments so that it will circulate into the economy. The government will encourage foreign companies to invest in the economy.

The difference between closed systems and open systems can be defined easily. Getting a better understanding of the two systems and how they work can help us operate throughout our daily lives and the world around us. As we grow we continue to learn about our economy and how the government interacts with households and companies.

For e.g. the government will go for foreign direct investments (FDI) and foreign trade zone (FTZ). They can offer them a lower tax and reduce the barriers of entry for foreign companies to invest in the economy.
In the closed system, households spend their money not only on domestic products but also on goods and services. While looking over the diagram should in the textbook, the inner flow of the closed system includes land, labor, and capital given to businesses from households to receive goods and services to the household. Households use the income (wages and salaries) for services offered to business to purchase goods and services from other businesses. On the other hand, businesses use the money received from households to buy factors of production they require. Thus, money flows in a circular motion within the economy. Therefore, the outer flows of a closed system include money from the household to business in order to pay for wages and rent for the houses.

Government Expenditures - The government collects taxes from the households and they use the taxes in government spending in order to create in-flows of funds back into the economy. For e.g. the government injects money in the economy by giving jobs through building, subsidies to company that is undergoing bankruptcy.

Exports - The government will encourage the local firms to sell their goods and services in foreign countries.

In conclusion, Carruthers’ and Uzzi’s (2000) paper demonstrates the complex nature of the interactions between businesses, households and government and illustrate how decisions affecting the economy are made by all three. Some scholars would argue that their approach to economics and the flow of goods and services is too socialist, as with the controversy of embeddeness, however, I would contend a socio-economic approach is the best way to explain the circular flow theory.

The foreign expenditures will goes back to the circular flow.

1.2 CONCLUSION:

I therefore conclude that the circular flow between households and firms is helpful. If we fully understand how the circular flow circulates we are having an advantage to know when we are going to invest our money.

In the textbook, there are two circular flow diagrams. One represents the flows in the macro-economy as a closed system and the other represents the flows as an open system. The circular flow diagrams show how money travels through the economic systems including businesses, households, foreign agents and governments (Editorial Board, 2013). Within the closed and open systems there are two consumers. The first consumers are households that buy goods and services and the second consumers are those businesses that purchase factors to produce. Households enter the goods market while the businesses enter factor markets.

It is very helpful for us to know why the government must implement taxes. They implement taxes to help our economy to be stable and to give us a safety place to live. In the circular flows I fully understand how important the factors of production (land, labour, capital, entrepreneurship) to the firms and how crucial the factors of income (rent, wages, interest, profit) to the households.
A simple model of the workings of an economy depicting the movement of resources between producers and consumers. A number of flows comprise the circular flow of income. First, there are the wages and salaries paid by firms to households. Secondly, there is the money spent by households and received by firms. Corresponding to each of these flows of cash is a flow of some resource in return - labour is provided by households to firms; goods and services are provided by firms for households. There is then a total of four flows in this highly stylized account of how economies function, and there is complete symmetry between the two sectors: households and firms. Each provides the other with some real resource and each receives cash in return; and each spends that cash on the supplies of the other. The same cash is spent by one sector and then the other continuously.

Question No.2

2.0 INTRODUCTION:

A business trade cycle is very crucial in every economy. By knowing and fully understanding the business trade cycle it will help us recover if we are experiencing depression and it can help us maintain if we are in a full employment level in economy.

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Business trade cycle is the fluctuations in the level of economic activities of a country over a period of time. It is also a persisting fluctuation in economic movement consisting of downturn and upturn and development and regression.
The second type of circular flow in the macro-economy is considered the open system. The open system is the opposite of the closed system. It is an economic model that counts goods and services exchanged domestically and between nations (Editorial Board, 2013). In the diagram in the textbook, it indicates the circular flow of money in an open economy system. Open systems allow energy and mass to pass through and across the system boundary. An example of an open system would be the ocean. The ocean is considered an open system because it allows energy and mass to pass through. Energy which is solar radiation, latent heat and mass including water vapor and precipitation all pass across the boundary between the atmosphere and hydrosphere of the ocean.

The cycle engage the shifts over the period of time between comparatively fast development of output (upturn and wealth), and stages of comparative stagnation or decline (retrenchment or depression). Using the gross domestic product fluctuations is often measured.
The first type of circular flow is that of the closed macro-economy system. This is the circular flow of money. A closed system is an economic model that counts only domestic exchanges but not the foreign agents. This therefore means that without foreign agents, the government or the economy is free of leakages. This system is basically shut off from surrounding environments and is self-contained. An example of a closed system would be the Earth system as a whole. Although energy passes across the Earth’s system boundary, no mass is exchanged throughout the Earth’s system and the rest of the universe (Ritter, M., 2011).

2.1 BODY:

2.1.1 CONCEPTS/ SITUATIONS OF THE BUSINESS TRADE CYCLES:

Full Employment - is a situation of the country's economy, where everyone or almost all individuals eager and capable to work at the existing salary and operational situations and are able to perform. In this level of economic activity all factors of production are completely utilized.

Businesses make up one of the sectors of the traditional circular flow model. Businesses are responsible for making the central decisions that affect what and how much of a product or service is available to household consumers and they make these decisions based on self-interest. In an attempt to describe the importance business plays in the circular flow of the economy, Carruthers and Uzzi (2000) state: “ Economic sociology must extend its distinctive approach to organizations, states, and markets if it is to widen its understanding of economy and society” (p.486). Understanding the new trends of how firms operate within, how they adapt to widespread privatization, corporate restructuring, and outsourcing gives economists greater perspective on how organizations “alter profoundly how wealth is accumulated and distributed” (Carruthers & Uzzi, 2000 p.486).

Unemployment - happens when individuals are jobless and they have keenly looked for job within the previous weeks. Rate of the frequency of unemployment and it is calculated as a percentage by dividing the number of unemployed persons by all persons presently in the force of labour is an unemployment rate.

The Forces of supply and demand - In the United States and in other free enterprise systems, the distribution of resources and products is determined by supply and demand. Demand is the number of goods and services that consumers are willing to buy at different prices at a specific time. A fundamental characterisic of demandis all else being constant, as prices fall, the quantity demanded rises. Vice versa all ther things remaining the same as price increases, the corresponding quanity demanded falls.

Recession - happens when economic growth becomes negative. The economy is having unemployment. Business cycle tightening, a major slowdown in economic movement is a recession. Recessions usually happen when there is an extensive fall in expenditure frequently following a difficult supply shock or the eruption of an economic bubble.

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Inflation - happens when there is a general rise in the level of prices. In inflation the economy is having a full employment. When the general cost level rises, every entity of money purchases lesser goods and services.

Non-supporters of the embeddeness theory believe that economics “can better be understood as resulting from the pursuit of self-interest by rational, more or less atomized individuals. My opinion on the issue rests with authors Carruthers, Uzzi and Granovetter as I believe the “autonomous” model to be too simplistic, and although I agree that households carry most of the decision-making power in the circular flow of goods, I also believe that the government’s interaction with the economy plays helps shape consumer and household decisions. Colander (2008) states that “ Government plays two general roles in the economy. It’s both a referee (setting the rules that determine relations between business and households) and an actor (collecting money in taxes and spending money on projects, such as defence and education) (p. 64).

Subsequently, inflation also replicates erosion in the buying strength of currency a loss of true worth in the internal channel of exchange and unit of account in the country.

2.1.2 BUSINESS TRADE CYCLE:

Annual Growth Rate (%)

C

+25 -------

+20 ------- D

+15 -------

+10 ------- B

+ 5 -------

0

A Time

The business trade cycle diagram has four phases and each phase have its own characteristics.

The circular flow model is defined as the flow of resources from households to firms and of products to firms from households. These flows are accompanied by reverse flows of money from firms to households and from households to firms. The circular flow is comprised of the resource market, households, product market, businesses, and the government.

Phase A - In phase A, it represents the depression in the economy. The economic activity in this level is the lowest. They are having motionless output. The firms are unenthusiastic. The firms are scared to produce more.

United States hires someone from India to work as a customer service representative. The households leaks when consumers buy goods and services from foreign businesses, and the money those households save whether in checking accounts or stocking. The business leaks when firms use labor, capital and other resources from foreign households. These leaks then inject money into the system.

The employment level in this phase is very low. The aggregate demand is lesser than the aggregate supply due to a high unemployment. People would not buy goods and services that are unnecessary. The inflation rate is negative in this level. Firms would not invest in this level or the firms will wait to invest new investments.
Injection is considered as things that enter into the households or businesses due to the leaks that were caused in the open system. An injection that comes into the household is that of foreign firms sending wages and rent to US households. An injection that comes into the businesses is that of foreign households purchasing goods produced by US firms. An example of a leakage would be a household buying a foreign car from a foreign company outside the United States. An example of an injection would be households in japan purchasing pens and pencils from firms in the United States.

Phase B - In phase B, it represents the recovery in the economy. The economic level activity in this economy is low but it is rising. Fast economic development as output levels increase. Firms become confident and will begin to invest.

Carruthers and Uzzi (2000) begin their paper by briefly highlighting the history of economic sociology. The authors describe that economist have come to accept as wisdom theories of “ how organizations influence individual action and respond to the environment” (p. 487) based on the economist’s “black box” metaphor of internal organization. The authors explain the focus from internal organization to the organization’s influence on economy as the “shifting from firms to markets” (p.486).

The employment level in this economy is rising. The resources are increasingly utilized. Space between authentic and possible general production level tightens. Aggregate demand is lesser than the aggregate supply due to the economic recovery but if it is booming it is possible to have an equal aggregate demand and aggregate supply.
Equilibrium Price - The supply and demand curves intersect at the point where supply and demand are equal. The price at which the number of products that businesses are willing to supply equals the amount of products that consumers are willing to buy at a specific point in time.

The economy is having a low but rising inflation rate. Recovery begins when firms would not postponed new funds to restore outdated assets.

Phase C - In phase C, it represents the prosperity in the economy.

The flow begins with workers leaving their households and going to work at businesses. They not only bring with them their labor, but also all the other factors of production, including land (natural resources), capital, and entrepreneurial talent.

The economy is experiencing a highest economic level activity. Companies are very confident and they are persistent to invest. In this phase the economy reached the peak level. The economy is experiencing a very high employment level.
Economic Sociology in the New Millennium by scholars Carruthers and Uzzi (2000) is a compelling paper that offers an in-depth analysis of economic sociology theories and how they can be used to explain the interactions between businesses, households, and government which form our understanding of the economy.

All resources are fully utilized and have reached maximum growth. The aggregate supply is equal to aggregate demand. The economy is experiencing a very high inflation rate. If the demand of household is high the firm's pricing will go up in order to achieve the fully utilized factors.
A Market is an institution or mechanism which brings together buyers (demanders) and sellers (suppliers) of particular goods and services.

Phase D - In phase D, it represents the recession in the economy. The economy is experiencing high but falling economic level activity. The production in this level will decline. Company's confident to invest begun to decrease.

Households also play an important role in the circular flow of goods and services. Colander (2008) states that “households are the most powerful economic institution. They ultimately control government and business, the other two economic institutions” (p. 63). The power of households comes in the form of votes that are cast to “determine government policy” (p.63), and which products and services business will produce and sell. Carruthers and Uzzi (2000) illustrate the power households have on businesses by demonstrating how corporations such as STATA, recognize and take advantage of consumer sovereignty in their decision- making. One of Carruthers’ and Uzzi’s (2000) key beliefs is the roles of business, households and government are “ in the process of being deconstructed into their constituent elements and reconfigured into new roles through identity bricolage” (p.487). What STATA and many other organizations are doing to remain competitive is to redefine the classic textbook circular flow of goods and services model by “literally turning customers into suppliers!” (p.487). Organizations today are transforming the way they interact with households and are more than ever relying on the consumer’s needs and desires (Carruthers & Uzzi, 2000). Businesses are able to take advantage of technology to transforms the “one way flow of information from seller to buyer into a two-way flow” (Carruthers & Uzzi, 2000, p. 487).

Unemployment is rising. Resources are not fully utilized in this level. Difference between authentic and possible general production expands. The aggregate supply is more than the aggregate demand. The economy is experiencing a high but falling inflation rate.
Colander, C. (2008). Economics (7th ed.). New York: McGraw-Hill.

Recession will begin if the firms will become pessimist and will stop investing. Hardship is extensive in this level but if the loss is not too critical it is still a recession level.

2.2 CONCLUSION:

In conclusion, the business trade cycle is very crucial in every businessman and even to normal individuals. We must be vigilant in our economy. We must know what is happening around us to avoid so much loss. During recession and depression, people should be very careful in spending money and save as much so that we would not end up in nothing.

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During recovery, it is a good time to invest but invest only if you are sure and analyze properly if the economy will going to boost or not. During prosperity, people will spend more as the employment level reaches its maximum growth.
The instruments may in the form of tax, subsidies, factor payments etc. Foreign sector : foreign sector is an integral one for any open economy. Since the international trade become more active every country take it as a vital one to make policy, improve national growth etc. in an open economy, factor rewards are flowing both in to the economy and out to the economy. Whatever may be the flow of transaction s it will come under the foreign sector or external sector. It includes imports, exports, granting loans between countries, payments for renting services like shipping, air services etc.

Investors and individuals can invest and spend as long as you know what is going on in the economy. Be sure that you are knowledgeable and well inform about your investments and in your future investments.

Together, the supply of resources and the payments for their use constitute the factor market. What do the businesses do with all those resources? Since we assumed no investment in new capital, no government, and no foreign sector, all they can do is produce consumer goods and sell them to households..

There is no harm in predicting the future's economy as long as you can coup up with it.

Question No.4

3.0 INTRODUCTION:

In every country there are people are unemployed. What are the main reason of being unemployed? Is it because of low qualification, above of the age limit or people are basically lazy? There are so many reason why people are being unemployed.

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These are due to economic level activity, firm's regulations on qualifications, age limit and own self perception. Some individuals are just lazy especially if the government are giving them allowances. Some countries like in USA their government is giving some allowances to the unemployed people. Some are experiencing shame to be unemployed some are undergoing depression of being unemployed.

According to http://www.bls.gov/news.release/mmls.nr0.htm the U.S. Bureau of Labour Statistics reported that in December 2010 employers took 1,483 mass layoff actions involving 137,992 workers.

Carruthers, B. & Uzzi, B. (2000). Economic sociology in the new millennium. Contemporary Sociology. 29(3), 486-494. Retrieved on December 18th, 2008 from: JSTOR database.

In a single employer at least 50 persons involved in a mass layoff. 19,564 are the total number of mass layoff events in 2010 and preliminary declares at 1,854,596 were lesser than in 2009 when both results and claims reached their maximum annual point on record.

Below is the table from year 1996 to 2010 Number of layoff events and initial claimants for unemployment insurance:

Year

Layoff Events

Initial Claimants For Unemployed Insurance 1996

14,111 1,437,628 1997

14,960 1,542,543 1998

15,904 1,771,069 1999

14,909 1,572,399 2000

15,738 1,835,592 2001

21,467 2,514,862 2002

20,277 2,245,051 2003

18,963 1,888,926 2004

15,980 1,607,158 2005

16,466 1,795,341 2006

13,998 1,484,391 2007

15,493 1,598,875 2008

21,137 2,130,220 2009

28,030 2,796,456 2010

19,564 1,854,596

3.1 BODY:

3.1.1 COST OF UNEMPLOYMENT:

Financial Cost - Individuals experience financial cost due to unemployment in the country. It affects financially to the unemployed person. Individuals can lose their nature of living. For e.g. unemployed person can lose his car, mortgage, things that he used to live and even people who used to be his friends. It also cost in his own family necessities. For e.g. if the unemployed is a family man it cost his wife and children's necessities.

Personal Cost - In this cost of unemployment it can affects the person's lifestyle, confidence, well of being and even psychological stability. The unemployed person will feel conscious of every person in his surroundings. He will feel insecure, he will think of what others talk behind his back and he even think nonsense towards others. By all of these the unemployed will do stupid things to cover their feelings like drinking alcoholic drinks, smoking and some taking drugs to ease their pain.

Societal Cost - In this cost of unemployment the person will become hysterical. As mention above about the personal cost that it can affects their emotional and psychological stability if these become unstable, the person might do some stupid things. For e.g. beating up his wife and children due to the wife's nagging. Neighbours and friend will keep distance not only to the unemployed person but to his family too. This will happen due to the uncertain deeds by the unemployed person.

Economic Cost - As in the circular flow of income labour is one of the factors of production.

And what do the members of the households do with their incomes? Since we assume no savings, government, nor foreign sector, all they can do is spend the money on consumer goods -- consumption. Together, the provision of goods and the payment for them constitute the product market.

If the economy is having an increased of unemployment it affects the income in the country. For e.g. as of the increasing of unemployment the firms will lower the wages of their employees and the employees cannot do anything, the employer can easily find another employees to replace them. This will cause a lower gross domestic product (GDP) or output in the country.

Costs to the government - Government gave us a safety place to live in, gives education, free medical and gives us some benefits. If unemployment increases, government can collects taxes lesser as unemployed cannot pay taxes to the government. Firms will be having lesser profit due to unemployment and there will be a reduction of corporate tax.

In return for the factors of production (resources or inputs), businesses pay incomes: wages, rent, interest and profits to the members of the households.

Households cannot spend more and only spend in the necessary goods, low consumption and low consumer spending. This will lead a decrease in tax revenues from service tax and value added tax (VAT). The government must to increase their benefits cost. For e.g. government will put on more spending in health care and education as the unemployed person cannot send their family in hospitals and in schools.

3.2 CONCLUSION:

I therefore conclude that the cost of unemployment has a big negative impact in our economy and the individuals surround it. The households, firms and the government should help each other in order to decrease the unemployment. Households should give the maximum factors of production. Firms will use all the factors of production efficiently. Government will monitor the economy vigilantly and must create a faster solutions if there is an increased of unemployment in the country. Government have to know what is the right time to increase and decrease taxes in order to balance the economy in the country. Furthermore, all individuals have their own responsibilities in order to have a full employment economy.

Question No.5:

4.0 INTRODUCTION:

Unemployment causes if the economy is having a depression and recession. It affects all the individuals in searching a job. If you resign from a job, the gap between the moment you resign and the time that you started to work again is also unemployment. There are some causes of unemployment. These are frictional unemployment, structural unemployment, technological unemployment, regional unemployment and seasonal unemployment.

4.1 BODY:

4.1.1 Causes of Unemployment

Frictional Unemployment - This type of unemployment happens when people is searching for a job. When the firm takes time to choose which candidates qualified the most for a certain job, those candidates are unemployed and the period of time of waiting is called frictional unemployment. For e.g. fresh graduate students they must take some time finding a job before they can find one.

Frictional unemployment happens due to factor immobility. These are geographical immobility and occupational immobility. Geographical immobility happens when an employee do not want to be relocated to another place. For e.g. a manager in a company may refused to be relocated to another state if he is going to be apart from his family. Occupational immobility happens when the employee cannot perform well to his job due to poor knowledge and lack of experience. For e.g. a fresh graduate engineer cannot fully comprehend the work due to his lack of experience.

Structural Unemployment - Happens when the economy in the country changes and it is experiencing a rapid growth while other industries are tightening and need to have a closure. For e.g. last time Malaysia in 1960's they focus in agriculture, 1980's focus in manufacturing companies and in 2000 they already focus in tourism. Structural unemployment happens if there is a change in demand trend, taste and preferences. For e.g. in 1980's there is a demand of leather jackets but as the changes in fashion occurs nowadays people prefer wear cotton than leather.

Technological Unemployment - Happens when there is a rapid growth of technological changes in the country. By this the firms will prefer to use machines than labourers. Automation will be use by the firms in order to increase productivity. For e.g. the machine can produce 500 outputs a day while in the other hand 10 labourers can produce 500 outputs. The firm will prefer to have a machine than more labourers. Redundancy will occur to the excess employees.

Regional Unemployment - Happens when a particular region is having unemployment. For e.g. a state is having a sea port in almost 15 years of operation suddenly they have a closure due to the changes of economic growth. They want to open an airport. The employees in the sea port will be unemployed and will switch to a job. However by switching a job they must undergo some training courses to coup with the new technologies.

Seasonal Unemployment - Happens when there is changes in weather and season in the country. Some countries are having four seasons like Europe. They have winter, spring, autumn and summer. Some jobs cannot carry if it is winter season and so on with the other seasons. For e.g. during winter in Europe the oceans freezes the fishermen cannot do fishing so they will wait until the block of ice in the oceans melt. Another example if it is raining for a month, the farmers cannot plant crops in the fields they will wait until the rain stops to enable to plant crops.

CONCLUSION:

I therefore conclude that having a full knowledge about the causes of unemployment will helps us create solutions on how to prevent to be unemployed for a long period of time. Individuals should prepare by upgrading themselves and do some training courses. By doing these it can helps us preparing ourselves specially the rapid changing of our technology. It is very helpful if individuals have their own part time job during seasonal unemployment. Fishermen can do some mechanics during winter season. The main point is that people do not want to be unemployed, one good solution is that people can reach out to the government programs so that they can coup up with the uprising economy in the country.

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