Download No Slide Title

The Circular Flow
of Income
The circular flow of income
Firms
Factor
payments
Consumption of
domestically
produced goods
and services (Cd)
Households
THE CIRCULAR FLOW OF INCOME
• Withdrawals
– net saving
– net taxes
– import expenditure
• Injections
– investment
– government expenditure
– export expenditure
The circular flow of income
INJECTIONS
Export
expenditure (X)
Investment (I)
Factor
payments
Consumption of
domestically
produced goods
and services (Cd)
Government
expenditure (G)
BANKS, etc
Net
saving (S)
GOV.
ABROAD
Import
Net
expenditure (M)
taxes (T)
WITHDRAWALS
THE CIRCULAR FLOW OF INCOME
• The relationship between injections and
withdrawals
– the links between them
– planned injections may not equal planned
withdrawals
• Equilibrium in the circular flow
• The circular flow and the four
macroeconomic objectives
The National Economy
Measuring National
Income
MEASURING NATIONAL INCOME
• The three ways of measuring GDP
– the production method
– the income method
– the expenditure method
The circular flow of national income and expenditure
The circular flow of national income and expenditure
(1) Production
(2) Incomes
(3) Expenditure
MEASURING NATIONAL INCOME
• The product method
– the problem of double counting
– the measuring of value added
– gross value added (GVA)
– some qualifications
• stocks
• government services
• ownership of dwellings
• taxes and subsidies on products
UK GVA (product-based measure): 2001
Agriculture, forestry and fishing £8 241 m
Mining, energy and water supply £41 378 m
0.9
4.7
Manufacturing
£153 132 m
17.5
Construction £47 327 m
5.4
Wholesale and retail trade; repairs £106 766 m
12.2
Hotels and restaurants £29 359m
3.4
Transport and communication £70 252 m
8.0
Banking, finance, insurance, etc. £6 667 m
0.8
Letting of property £209 839 m
24.0
Public administration and defence £42 096 m
4.8
Education, health and social work £114 069 m
13.0
Other services £45 101 m
5.2
Total GVA £874 227 m
100.0
UK GVA (product-based measure): 2001
Agriculture, forestry and fishing £8 241 m
Mining, energy and water supply £41 378 m
0.9
4.7
Manufacturing
£153 132 m
17.5
Construction £47 327 m
5.4
Wholesale and retail trade; repairs £106 766 m
12.2
Hotels and restaurants £29 359m
3.4
Transport and communication £70 252 m
8.0
Banking, finance, insurance, etc. £6 667 m
0.8
Letting of property £209 839 m
24.0
Public administration and defence £42 096 m
4.8
Education, health and social work £114 069 m
13.0
Other services £45 101 m
5.2
Total GVA £874 227 m
100.0
UK GVA (product-based measure): 2001
0.9
4.7
Manufacturing
£153 132 m
17.5
Construction £47 327 m
5.4
Wholesale and retail trade; repairs £106 766 m
12.2
Hotels and restaurants £29 359m
3.4
Transport and communication £70 252 m
8.0
Banking, finance, insurance, etc. £6 667 m
0.8
Letting of property £209 839 m
24.0
Public administration and defence £42 096 m
4.8
Education, health and social work £114 069 m
13.0
Other services £45 101 m
5.2
Total GVA £874 227 m
100.0
Percentage of GVA
Agriculture, forestry and fishing £8 241 m
Mining, energy and water supply £41 378 m
UK GVA by category of income: 2001
Compensation of employees
(wages and salaries)
£556 371 m
Operating surplus
(gross profit, rent and interest of firms
government and other institutions)
£238 625 m
63.6
27.3
Mixed incomes
£60 073 m
6.9
Tax less subsidies on production
(other than those on products) plus
statistical discrepancy £19 158m
2.2
Total GVA £874 227m
100.0
UK GVA by category of income: 2001
Compensation of employees
(wages and salaries)
£556 371 m
Operating surplus
(gross profit, rent and interest of firms
government and other institutions)
£238 625 m
63.6
27.3
Mixed incomes
£60 073 m
6.9
Tax less subsidies on production
(other than those on products) plus
statistical discrepancy £19 158m
2.2
Total GVA £874 227m
100.0
UK GVA by category of income: 2001
Compensation of employees
(wages and salaries)
£556 371 m
27.3
Mixed incomes
£60 073 m
6.9
Tax less subsidies on production
(other than those on products) plus
statistical discrepancy £19 158m
2.2
Total GVA £874 227m
100.0
Percentage of GVA
Operating surplus
(gross profit, rent and interest of firms
government and other institutions)
£238 625 m
63.6
UK GDP (product-based measure): 2001
GVA (gross value added at basic prices)
£874 227m
plus Taxes on products
£120 499m
less Subsidies on products
GDP (at market prices)
£6 712m
£988 014m
UK GDP (product-based measure): 2001
GVA (gross value added at basic prices)
£874 227m
plus Taxes on products
£120 499m
less Subsidies on products
GDP (at market prices)
£6 712m
£988 014m
UK GDP (product-based measure): 2001
GVA (gross value added at basic prices)
£874 227m
plus Taxes on products
£120 499m
less Subsidies on products
GDP (at market prices)
£6 712m
£988 014m
UK GDP (product-based measure): 2001
GVA (gross value added at basic prices)
£874 227m
plus Taxes on products
£120 499m
less Subsidies on products
GDP (at market prices)
£6 712m
£988 014m
UK GDP by category of expenditure, GNI and NNI: 2001
£million
Consumption expenditure of households and NPISH (C)
655 265
Government final consumption (G)
190 663
Gross capital formation (I)
164 048
Exports of goods and services (X)
268 451
less Imports of goods and services (M)
Statistical discrepancy
290 912
499
Gross domestic product (GDP) (at market prices) 988 014
UK GDP by category of expenditure, GNI and NNI: 2001
£million
Consumption expenditure of households and NPISH (C)
655 265
Government final consumption (G)
190 663
Gross capital formation (I)
164 048
Exports of goods and services (X)
268 451
less Imports of goods and services (M)
Statistical discrepancy
290 912
499
Gross domestic product (GDP) (at market prices) 988 014
plus Net income from abroad
Gross national income (GNI)
5 756
993 770
UK GDP by category of expenditure, GNI and NNI: 2001
£million
Consumption expenditure of households and NPISH (C)
655 265
Government final consumption (G)
190 663
Gross capital formation (I)
164 048
Exports of goods and services (X)
268 451
less Imports of goods and services (M)
Statistical discrepancy
290 912
499
Gross domestic product (GDP) (at market prices) 988 014
plus Net income from abroad
Gross national income (GNI)
less Capital consumption (depreciation)
Net national income (NNI)
5 756
993 770
111 275
882 495
Macroeconomic equilibrium
• In a very simple economy, it must be that:
–Y=C+I
–Y=C+S
– C + S = C + I i.e. S = I
• Actual savings are by definition equal to
actual investment by it is by no means
guaranteed that planned savings match
planned investments
• The saving and investment decisions are
taken by various groups, and if there is a
mismatch, instability may be generated
All income is consumed GNI = GNP = 100
Consumption = 100
Households
Firms
GNI = 100
What happens if households want to save
part of their income (S = 10) ?
Planned savings equal planned investments
Consumption = 90
Households
S=10
Capitalmarket
I=10
Firms
GNI = 100
Savings are a leakage (withdrawal) from the
circular flow
Households want to save more
Consumption = 80
Households
S=20
Capitalmarket
I=10
Firms
GNI = 100
There is an unplanned increase in inventories
since households save more
Households want to save more
Consumption = 40
Households
S=10
Capitalmarket
I=10
Firms
GNI = 50
The equilibrium level of income is reduced
as firms cut back on production.