Circular Flow of Income
Circular Flow of Income :
A model of the economy which shows the flow of goods services factors their payments around the
economy
+
, ,
① Within a closed
economy
② Within an
open economy
③
Measuring national income
Closed
Economy An without foreign trade Open Economy An
foreign trade
:
with National Income National Expenditure National Output
:
economy .
economy = =
Goods Service
himBack in
+
Methods of calculation
/Cages
-
,
rents
,
dividends
, y
interest
y -
Households
Measuring
·
Measuring
income :
expenditure : total
Sum of incomes
value
earnt
of
through production of goods
consumption of final goods +
+ services
services.
.
Households
S
-
Firms
& Measuring value gained through production
-
output
:
&·meeped
- Trade
export-
Foreign & imports
Physical Flow Flow of
:
a
good/service
Flow Flow of
Monetary :
money
Injections Money that enters
: into the
economy
L Government Spending ,
Investment +
Exports
Leakages/Withdrawals Money : that leaves the
economy
↳ Tax Savings + Imports
,
National income
equilibrium When the withdrawals
economy's injections
:
are
equal its .
↳ Net injections means an increase in national output
↳ Net leakages means a
decrease in national output
, ① General Concepts
Aggregate Demand ② Graphical Representations
PL
Demand The total
Aggregate quantity demanded of country's goodsa price level time period
:
a at +
given
services a
AD = c + 1 + G + (x M)-
· AD
RGDP
Yo Y,
Consumption :
How much consumers
spend on
goods + services
↳
largest component of AD (around 60%) Changes in
price
level causes a movement
along the AD curve
↳ affected by : interest rates + confidence
downward
Why is the AD curve
sloping ?
Investment :
Spending on
capital goods
↳ around 15% of UK AD
Wealth Effect Changes
:
in PL changes real value of wealth
↳ ↑ real wealth d : consumptiond output&
↳ affected by :
rate of economic growth previous changes in income (accelerator theory) ,
,
in PL =
consumption &
↳ real wealth &
business confidence demand for exports interest rates government policy (i
,
. e . tuxation b in PL = :
output
, ,
Government Spending Spending by the
:
Government on state goods + services
·
Interest Rate Effect :
When
price is high ,
interest rate increases : cost of borrowing &, borrowing 6
↳ around 20 % of UK AD demand d output to
,
↳ affected by :
economic
growth fiscal policy The
,
:
use of Government spending + tax policies to influence economic conditions
demand-side policy
·
International Trade Effect When price :
is low exports become more competitive + costless i demand for exports &
It is
.
a ,
. ,
output ↑
Net Exports The : value of total exports minus total imports value
,
of the current account on the balance of payments
PL
↳ around 1% of Ul AD
of the world economy global
Po----
L affected by : real income
exchange rates
,
state competitiveness
, ,
Changes in components of AD causes shifts in the AD curve
Accelerator Theory : Previous changes in income affect current/future levels of investment
, ① General Concepts
Aggregate Demand ② Graphical Representations
PL
Demand The total
Aggregate quantity demanded of country's goodsa price level time period
:
a at +
given
services a
AD = c + 1 + G + (x M)-
· AD
RGDP
Yo Y,
Consumption :
How much consumers
spend on
goods + services
↳
largest component of AD (around 60%) Changes in
price
level causes a movement
along the AD curve
↳ affected by : interest rates + confidence
downward
Why is the AD curve
sloping ?
Investment :
Spending on
capital goods
↳ around 15% of UK AD
Wealth Effect Changes
:
in PL changes real value of wealth
↳ ↑ real wealth d : consumptiond output&
↳ affected by :
rate of economic growth previous changes in income (accelerator theory) ,
,
in PL =
consumption &
↳ real wealth &
business confidence demand for exports interest rates government policy (i
,
. e . tuxation b in PL = :
output
, ,
Government Spending Spending by the
:
Government on state goods + services
·
Interest Rate Effect :
When
price is high ,
interest rate increases : cost of borrowing &, borrowing 6
↳ around 20 % of UK AD demand d output to
,
↳ affected by :
economic
growth fiscal policy The
,
:
use of Government spending + tax policies to influence economic conditions
demand-side policy
·
International Trade Effect When price :
is low exports become more competitive + costless i demand for exports &
It is
.
a ,
. ,
output ↑
Net Exports The : value of total exports minus total imports value
,
of the current account on the balance of payments
PL
↳ around 1% of Ul AD
of the world economy global
Po----
L affected by : real income
exchange rates
,
state competitiveness
, ,
Changes in components of AD causes shifts in the AD curve
Accelerator Theory : Previous changes in income affect current/future levels of investment
Circular Flow of Income :
A model of the economy which shows the flow of goods services factors their payments around the
economy
+
, ,
① Within a closed
economy
② Within an
open economy
③
Measuring national income
Closed
Economy An without foreign trade Open Economy An
foreign trade
:
with National Income National Expenditure National Output
:
economy .
economy = =
Goods Service
himBack in
+
Methods of calculation
/Cages
-
,
rents
,
dividends
, y
interest
y -
Households
Measuring
·
Measuring
income :
expenditure : total
Sum of incomes
value
earnt
of
through production of goods
consumption of final goods +
+ services
services.
.
Households
S
-
Firms
& Measuring value gained through production
-
output
:
&·meeped
- Trade
export-
Foreign & imports
Physical Flow Flow of
:
a
good/service
Flow Flow of
Monetary :
money
Injections Money that enters
: into the
economy
L Government Spending ,
Investment +
Exports
Leakages/Withdrawals Money : that leaves the
economy
↳ Tax Savings + Imports
,
National income
equilibrium When the withdrawals
economy's injections
:
are
equal its .
↳ Net injections means an increase in national output
↳ Net leakages means a
decrease in national output
, ① General Concepts
Aggregate Demand ② Graphical Representations
PL
Demand The total
Aggregate quantity demanded of country's goodsa price level time period
:
a at +
given
services a
AD = c + 1 + G + (x M)-
· AD
RGDP
Yo Y,
Consumption :
How much consumers
spend on
goods + services
↳
largest component of AD (around 60%) Changes in
price
level causes a movement
along the AD curve
↳ affected by : interest rates + confidence
downward
Why is the AD curve
sloping ?
Investment :
Spending on
capital goods
↳ around 15% of UK AD
Wealth Effect Changes
:
in PL changes real value of wealth
↳ ↑ real wealth d : consumptiond output&
↳ affected by :
rate of economic growth previous changes in income (accelerator theory) ,
,
in PL =
consumption &
↳ real wealth &
business confidence demand for exports interest rates government policy (i
,
. e . tuxation b in PL = :
output
, ,
Government Spending Spending by the
:
Government on state goods + services
·
Interest Rate Effect :
When
price is high ,
interest rate increases : cost of borrowing &, borrowing 6
↳ around 20 % of UK AD demand d output to
,
↳ affected by :
economic
growth fiscal policy The
,
:
use of Government spending + tax policies to influence economic conditions
demand-side policy
·
International Trade Effect When price :
is low exports become more competitive + costless i demand for exports &
It is
.
a ,
. ,
output ↑
Net Exports The : value of total exports minus total imports value
,
of the current account on the balance of payments
PL
↳ around 1% of Ul AD
of the world economy global
Po----
L affected by : real income
exchange rates
,
state competitiveness
, ,
Changes in components of AD causes shifts in the AD curve
Accelerator Theory : Previous changes in income affect current/future levels of investment
, ① General Concepts
Aggregate Demand ② Graphical Representations
PL
Demand The total
Aggregate quantity demanded of country's goodsa price level time period
:
a at +
given
services a
AD = c + 1 + G + (x M)-
· AD
RGDP
Yo Y,
Consumption :
How much consumers
spend on
goods + services
↳
largest component of AD (around 60%) Changes in
price
level causes a movement
along the AD curve
↳ affected by : interest rates + confidence
downward
Why is the AD curve
sloping ?
Investment :
Spending on
capital goods
↳ around 15% of UK AD
Wealth Effect Changes
:
in PL changes real value of wealth
↳ ↑ real wealth d : consumptiond output&
↳ affected by :
rate of economic growth previous changes in income (accelerator theory) ,
,
in PL =
consumption &
↳ real wealth &
business confidence demand for exports interest rates government policy (i
,
. e . tuxation b in PL = :
output
, ,
Government Spending Spending by the
:
Government on state goods + services
·
Interest Rate Effect :
When
price is high ,
interest rate increases : cost of borrowing &, borrowing 6
↳ around 20 % of UK AD demand d output to
,
↳ affected by :
economic
growth fiscal policy The
,
:
use of Government spending + tax policies to influence economic conditions
demand-side policy
·
International Trade Effect When price :
is low exports become more competitive + costless i demand for exports &
It is
.
a ,
. ,
output ↑
Net Exports The : value of total exports minus total imports value
,
of the current account on the balance of payments
PL
↳ around 1% of Ul AD
of the world economy global
Po----
L affected by : real income
exchange rates
,
state competitiveness
, ,
Changes in components of AD causes shifts in the AD curve
Accelerator Theory : Previous changes in income affect current/future levels of investment
