MACRO - LS5 - The Circular Flow Of Income Model Flashcards
The circular flow of income
It’s a model of the economy which shows the flow of goods & services & factors their payments around the economy
- an economic model that shows flows of goods and services and their factors of production between firms and households. The circular flow shows how national income/GDP is calculated
National output
(O)
This is the value of the flow of goods & services from firms to households
National expenditure
(E)
This is the value of spending by households on goods and services
National income
(Y)
This is the value of income paid by firms to households in return for land, labour and capital
How is national income, output and expenditure related
They are all equal and identical (what goes in comes out)
What is an injection into the circular flow
spending which does not come from households
What is a withdrawal/leakage from the circular flow
spending which does not flow back from households to firms
What are the 3 injections
Investment (I)
Government spending (G)
Exports (E)
What are the 3 withdrawals/leakages
Savings (S)
Taxes (T)
Imports (M)
Investment (I)
Spending by firms (loans) on capital equipment like factories, offices, machinery
Also spending on stocks (or inventories) of goods which are used in the production process
Government Expenditure (G)
Spending by central and local government and other agencies
Exports (X)
Spending by foreigners on goods/services made in the UK
Savings (S)
For households it’s money which isn’t spent them
For firms it’s money not spent on wages/profits
What both choose to save
Taxes (T)
Paid to the government, taking money from households and firms
Imports (M)
From abroad are brought both by households and firms
Spending on foreign goods by the UK
