Circular flow of income Flashcards
Three injections
Investment spending, exports, government spending
3 leakages / withdrawals
Savings, taxation, imports
What is added to the circular flow model when there is an external trade sector?
There is an extra injection and withdrawal of exports and imports.
What is added to the circular flow model when a financial sector is added?
The financial sector includes commercial banks debt and equity markets, and helps channel savings into funding productive investment. Households save money resulting in more money in the financial sector which results in business investment for firms.
When is the economy in equilibrium?
When the rate of injections equals the rate of withdrawals
Trade surplus
When the value of export is greater than the value of imports
a net injection into the circular flow
Trade deficit
When the value of exports is less than the value of imports
A net leakage from the circular flow
What would cause a rise in equilibrium national output?
When the government is running an expansionary fiscal policy and operating with a bigger budget deficit so government spending ( injections) is greater than tax revenues
What would cause a contraction of equilibrium national output?
At a time of fiscal austerity when a government is seeking to reduced the size of the budget deficit, leakages will be rising eg.tax
Formula for AD
C+I+G+(X-M)
Value added definition
The increase in market value of goods or services during each stage of production or supply
Value added equation
Value of production - value of intermediate inputs used in supplying a good
What percent does manufacturing contribute to UK GDP?
10%
What percent does the service sector account for UK output?
80%
What is the difference between GDP and GNP?
Gross domestic product refers to the value of everything produced domestically so within the country’s borders whereas gross national product refers to the value of everything produced by factors of production owned by the country, no matter where they are located.
