Circular flow of income Flashcards
Circular flow
- A model that demonstrates how money flows through society
The use of circular flow
- Using the circular flow, we can measure the value of output in 3 ways:
- National output
- National expenditure
- National income
- National output ≡ National Income ≡ National expenditure
National output
Is the value of goods and services produced by firms
National income
Is value of rent, wages, interest and profits paid to households
national expenditure
Is value of spending by households
What’s shown in the model
- Income (Y)
- Resources
- Output
- Expenditures
Income (Y)
- Wages
- Rent
- Interest
- Profit
Resources
- Labour
- Land
- Capital
- Enterprise
Output
Goods and services produced
Expenditure
Consumption of goods and services
Injections
Money that joins the circular flow as a result of spending on goods and services from a group other than households
Leakages
Money that leaves the circular flow passing from households to a group other than the firms. Aka withdrawal from the circular flow
The injections in the Circular flow*
- Investment
- Exports (X)
- Government spending
The leakages in the circular flow*
- Savings
- Taxes
- Imports
Problems with the model
- Its a very basic model
- Not very realistic
- Missing 3 economic entities
- Financial institutions
- Government
- Foreign countries
- With these entities they introduce the concept of leakages and injections into the circular flow*
Simple economy
- Household
- Firms
Mixed economy
- Household
- Firms
- Government
Open economy
- Households
- Firms
- Foreign countries
“Closed” economy
- NO trade
National income
- It represents the total market value of the flow of output of goods and services produced in an economy over a period of time (usually one a year)
Key uses of national income data
- Measuring the level and rate of growth of national income (Y) is important of keeping of:
> The rate of economic growth
> Changes to living standard
> Changes to the distribution of income between groups within the population
