Download Economics – Circular flow of income

Economics – Circular flow of income
International Business School
Hanze University of Applied Sciences, The Netherlands
Learning objective
1.  Explain the circular flow of income
2.  Define GDP
3.  Describe the relationship between GDP and the circular flow of
income
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Circular flow of income
The circular flow diagram shows the transactions among
households, firms, governments, and the rest of the world.
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By the end of this
video you should
be able to explain
the following flow
chart:
Parkin, 2015
By the end of this
video you should
be able to explain
the following flow
chart:
Households
Households are the owners of the factors of
production:
•  land – natural resources
•  labour – human resources
•  capital – man-made resources
•  enterpreneurship
Households offer the factors on production to firms in
return for payment:
•  land – rent
•  labour – wages
•  capital – interest
•  enterpreneunship - profit
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Factor payment
Total of factor payments =national income (Y)
Firms
Firms use the factors of production to produce their goods and
services.
Households, using the money they received for the factors of
production, purchase goods and services.
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Consump(on Firms
To be able to produce, firms need to purchase fixed assets (plants,
equipment and buildings).
investments (also the additions to inventories are investments)
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Investments Governments
Governments are responsible for the provision of public goods and
services.
•  public good: a product provided without profit to all members of
society (police, infrastructure etc.)
Purchase of public goods and services: government expenditure
Besides purchase of public goods and services, governments are
responsible for social welfare system:
•  payments, like for example disability benefits, are transfer
payments and not part of the the circular flow of income.
•  transfer: at the expense of one tax payer to the benefit of
another tax payer.
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Government expenditure Trade
Firms sell goods and services to the rest of the world—exports—
and buy goods and services from the rest of the world—imports.
The value of exports (X ) minus the value of imports (M) is called
net exports (X – M).
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Trade
Gross Domestic Product (GDP)
=The value of goods and service provided in an economy
Gross Domestic Product (GDP)
Y=C+I+G+X–M
Now, can you
explain the
following flow
chart?
To be continued
You will learn the “business cycle” in the coming part.
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