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Individual Study №. 1
on „Business system today”
CHIȘINĂU 2018
Summary:
I. What is a “BUSINESS”…………………………………………………………3
II. Our business system today....................................................................................3
III. The circular flow of system……………………………………………………..3
1. Households…………………………………………………………………..4
2. Businesses…………………………………………………………………...4
3. Governments………………………………………………………………...4
2
I. What is a “BUSINESS” ?
The interaction among these three groups are shown in the figure below.
3
1. Households
Households are both consumers of goods and owners of the productive resources of land, labor,
and capital. As resource owners, the members of households provide businesses with the means
of production. In return, businesses pay rent, wages, and interest, which households receive as
income. As consumers, households members use this income to purchase the goods and services
produced by business.
2. Businesses
Like households, businesses are engaged in two exchanges. They exchange money for the
factors of production, and they use the resources to produce goods and services. Then they
exchange their products for sales revenue. This sales revenue, in return, is exchanged for additional
resources, which are used to produce and sell more products. So the circular flow is continuous:
Business pays wages, rent and interest which become household income which becomes
consumer spending which becomes sales revenue which again becomes wages, rent, and interest.
And so on.
3. Governments
Governments are deeply involved in business life. To pay for all these services, governments
collect a variety of taxes from households (such as personal income taxes and sales taxes) and
from businesses (corporate income taxes). The figure shows this exchange of taxes for government
services. It also shows governments spending for resources and products required to provide these
services. In other words, government, too, return their income to the business system through the
resources and product markets. The circular flow of business activity, including government, is
thus complete and self-contained. That is, the system works.
Actually, with government included, our so-called circular flow looks more like a combination of
several flows. And it really is. The important point is that, together, the various flows make up a
single unit- a complete system that effectively provides answers to the basic economic questions.