The Circular Flow of Income

The Circular Flow of Income

What sectors make up an economy?What sectors make up an economy?

HouseholdsFirmsGovernmentInternational

The circular flow of incomeThe circular flow of income

The interdependence of goods markets

and factor markets

The interdependence of goods markets

and factor markets

FIRMS(suppliers of goods and services,

demanders of factor services)

HOUSEHOLDS(demanders of goods and services,

suppliers of factor services)

The interdependence of goods and factor marketsThe interdependence of goods and factor markets

Q1

P1

QF2

PF2

Q2

P2PF1

QF1

D2D2

The interdependence of goods and factor marketsThe interdependence of goods and factor markets

P

Q

P

Q

££ ££

££££

Factorservices

Goods

GoodsFactor

services

S S

D1 D1

(1)Consumer

demand

(1)Consumer

demand

(4)Factor supply

(4)Factor supply

(3)Factor

demand

(3)Factor

demand

(2)Producer

supply

(2)Producer

supply

OO

Multiplier effect

The circular flow of incomeThe circular flow of income

Consumption, injections, withdrawals

and equilibrium

Consumption, injections, withdrawals

and equilibrium

Need a whole A4 page for this diagramNeed a whole A4 page for this diagram

Need it to be landscape

Start off on the far left side…..

Need lots of space for the diagram to ‘grow’….

Factorpayments

Factorpayments

Consumption ofdomestically

produced goodsand services (Cd)

Consumption ofdomestically

produced goodsand services (Cd)

The circular flow of incomeThe circular flow of income

Firms

Households

Factorpayments

Factorpayments

Consumption ofdomestically

produced goodsand services (Cd)

Consumption ofdomestically

produced goodsand services (Cd)

Investment (I)Investment (I)

Governmentexpenditure (G)

Governmentexpenditure (G)

Exportexpenditure (X)

Exportexpenditure (X)

BANKS, etc

Netsaving (S)

Netsaving (S)

GOV.

Nettaxes (T)

Nettaxes (T)

ABROAD

Importexpenditure (M)

Importexpenditure (M)

The circular flow of incomeThe circular flow of income

WITHDRAWALS

INJECTIONS

Key terms…Key terms…

Injections = I + G + X

Withdrawals = S + T + M

Injections = I + G + X

Withdrawals = S + T + M

Circular Flow of Income – what if….Circular Flow of Income – what if….

What if Injections* are greater

than withdrawals?

*Injections = I + G + X

Multiplier effect

What if withdrawals* are greater

than Injections?

*Withdrawals = S + T + M

Government Macro Economic policies…Government Macro Economic policies…

Look at managing injections and withdrawals to allow a positive economic growth of 2% per year.

The Govt can achieve this either by

reducing withdrawals

or by increasing injections

National IncomeNational Income

Measuring economic growth

Measuring economic growth

National GrowthNational Growth

National Income = all incomes from FoP are added (from Firms to Households)

National Product = all g & s produced (by firms)

National Expenditure (AD) = all expenditure on output is added.

What’s the differenceWhat’s the difference

GDP v GNPGDP v GNP

GDP v GNPGDP v GNP

GDP measures the value of output produced within the domestic boundaries of the UK over a given time period.

GDP includes the output of the many foreign owned firms that are located in the UK following the high levels of foreign direct investment in the UK economy over many years.

GNP measures the final value of output or expenditure by UK owned factors of production whether they are located in the UK or overseas.

Many foreign firms have set up production plants in the UK whilst UK firms have expanded their operations overseas and become multinational (or trans-national) organisations.

Key Terms needed…..Key Terms needed…..

Real & Nominal Real & Nominal

NominalNominal

Nominal or current GDP looks at the monetary value

Nominal or current GDP looks at the monetary value

Real Real

Real takes into account of inflation

Real takes into account of inflation