The microeconomics we study the economy of one country, then try to

understand how 2 countries interact and trade and hopefully,

understand the global economy, so today, we are going to study the
circular flow of income.
Let’s make things really simple, imagine we are alone on an isolated
island, there’s no government, no trade, no savings, I told you, it’s
simple, there’s only firms and households, firms provide households
with goods and services, out of thin air? Firms gotta get factors of
production from households, it can be labor, land, capital or face it.
Some of us is households are going to be entrepreneurs, so
entrepreneurships. We don’t get freebies from firms, we don’t provide
labors for free either, so there’s money flowing in the opposite
direction, households gotta pay firms for the goods they get, firms also
gotta pay household in the form of wages, rents, interests or profits,
but this is a little weird we don’t spend everything we earn in real life so
let’s add savings. Savings is money we don’t spend so there’s money
flowing out, savings don’t just sit in banks, banks invest in firms by
lending to them cos firm needs money to buy capital equipment or
cover other costs of production, so that’s investments flowing into the
economy, Government buy staff as well so there’s money flowing in.
government gets money from taxes, taxes so these money flowing out
cos for the money we’re paying as taxes, we cannot spend it, lastly,
countries interact with one another imagine this is American economy
let’s add trade, American imports stuff for example, American can
import shoes from china, shoes flow from china into America, and
money spent on imports flow out of America into china. America
exports too, America can produce software and export it to foreigners,
money then flows from foreign countries into America. These America’s
export earnings. Investments, government spending and export
earnings are called injections cos money is flowing in, saving taxes and
import spending are called leakages or withdrawals cos money leaks
out the system, and injections and leakages are sort of related.
Investments come from savings, government spending comes from
taxes, American makes money from foreigners by exporting, but
foreigners also make money from America when America imports
(circular flow of income) it tells us roughly how an economy functions,
how do we measure the size of an economy then? By measuring gross
domestics production or GDP. GDP is the total value of all final goods
and services produced within the borders of a country during a given
period, why must it be final goods and services?