Business Studies - Economy

 What Is the Economy?

An economy is the system for deciding how scarce resources are used so that goods and services can be produced and consumed. Resources are things like land, people (who can work or innovate through their ideas) and raw materials. They are seen as scarce because we have unlimited wants but there are not enough resources to produce the goods and services to satisfy these wants. The economy is important to all of us. What’s happening in the economy can affect us and the decisions we make. Our decisions can also influence how the economy is performing. Every time you choose to buy something (or not to), you are affecting the economy. 

Sectors Of the Economy

In the economy there are five sectors: Households sector, Firms sector, Financial Sector, Government sector and Overseas Sector. 

Household Sector

This sector is made up of individiuals in the economy.

• They provide their time and skills or ‘labour’ to firms in exchange for income (wages). 

• They are consumers who buy goods and services from Firms.

• They may borrow from, or save money with, the Financial sector. 

• They pay taxes to the Government. 

Firms Sector

This sector is made up of all businesses in the economy. 

• They produce output (goods and services), which they sell to consumers and receive revenue. 

• They may borrow money from, or save money with, the Financial Sector

• They pay taxes to the Government.

Financial Sector

This sector is made up of banks and other financial institutions in the economy. 

• They receive savings from Households and Firms

• They help households and Firms invest by lending them money. 

Government Sector

This sector is made up of all bodies in national, state and local governments

• They receive taxation revenue from Households and Firms

• They spend this money on public goods and services, such as roads, parks, schools and hospitals. 

Overseas Sector

This sector relates to New Zealand’s trade with other nations.

• New Zealand exports (sells) goods and services, produced by businesses in New Zealand, to other countries.

• New Zealand imports (buys) goods and services, produced by businesses in other countries. 

Injections and Leakages

In the circular flow model, money flows in and out of the economy. Think of a bathtub with the tap on but the plug out. Water is being added by the tap but also leaking out. It's important to get the balance right so the water doesn’t overflow or drain out completely. 

Think of all the exchanges taking place in the economy.

Some are putting money into the economy. These are injections. 

Some of these are taking out money out of the economy - the money is not being utiised elsewhere in the economy. These are leakages. 

The Financial sector plays an important role in facilitating business investment. Firms rely on banks lending them money so they can invest in things like new equipment, higher wages or additional staff, to increase production.