MYP Individuals & Societies Economic Interdependence Notes

Economic Interdependence Means Choices In One Part Of The Economy Affect Others

1. Economic interdependence is the idea that households, firms, governments, banks, and the foreign sector are connected, so a change in one part of the system creates knock-on effects elsewhere.
2. When you buy something, you are not just satisfying a personal want.
   1. You are also creating revenue for a producer, income for workers, potential tax revenue for government, and possibly demand for imported inputs.
3. A practical way to understand interdependence is to track the economy as a set of linked flows: flows of goods and services, flows of resources used in production, and flows of money.

The Circular Flow Of Income Shows The Economy As A System

1. The circular flow of income is a model that represents (in a simplified way) all transactions between all buyers and sellers in an economy. It highlights two central exchanges:
   1. Households buy goods and services from firms, and firms receive revenue from consumer expenditure.
   2. Firms buy factors of production from households, and households receive income for supplying labour, land, and capital (for example wages, rent, interest, and profit).
2. People are therefore both workers and consumers.
   1. This creates feedback loops: if households reduce spending, firms earn less, which can lead to lower output and fewer jobs, which then reduces household income further.
   2. This is one reason economies can sometimes move into a vicious cycle.

Leakages And Injections Determine Whether The Economy Shrinks Or Grows

Leakages Are Flows Out Of Spending

1. Leakages reduce total spending in the economy. The most common leakages are:
   1. Savings (S): households set aside income instead of spending it now.
   2. Taxes (T): money paid to government reduces household or firm spending power (in the short run).
   3. Imports (M): spending on foreign-produced goods and services sends income abroad.

Injections Are Flows Into Spending

1. Injections increase total spending in the economy: