Download Circular Flow fin - Business-TES

To define the terms in the Circular flow of income
Explain the inter-relationship between expenditure,
income and production
To explain why injections = leakages.
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There are ‘measuring national income’ notes to go
along with this powerpoint.
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Households
FIRMS
Government
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Goods and services
Households
Firms
FOP Input:
Household includes workers, managers, entrepreneurs
etc. i.e. people
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Spending on
goods and services
Households
Firms
FOP incomes
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Spending on
goods and services
Goods and services
Households
Firms
Services of
productive factors
Factor incomes
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Expenditure
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Income
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the sum of incomes all factor incomes
Output
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the sum of expenditures in the economy
the sum of output (value added) produced in the
economy
All three approaches are should give you the
same final figure for national output
Spending on
Expenditure
goods and services
GoodsOutput
and services
Households
Firms
Services of
productive factors
Income
Factor
incomes
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Total value added
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Gross domestic product (GDP)
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is the economy’s net output after deducting goods
used during production
to avoid double counting
E.g. egg, milk, flour used for making muffins.
MUFFINS. Final Good.
measures the output produced by factors of
production located in the domestic economy over a
period of time, usually a year.
Leakages (in terms of flow of payment)
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money paid to the households but not returned to firm
Or flow of payments that started from firms but did not
return back to firms
e.g. household savings, net taxes and imports
Spending on
goods and services
Leakages
Households
Firms
Factor incomes
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Injections (in terms of flow of payment)
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are revenue for firms not from sales to household
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e.g. investment by firms, government purchases and
exports
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Spending on
goods and services
Injections
Households
Firms
Factor incomes
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Government
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spends money on goods & services (G)
finances welfare payments, i.e. transfer payments (B) this
spending is financed by taxes (T)
Foreign Sector:
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Export (X)
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made at local economy but sold abroad
Import (M)
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made abroad and bought at local economy.
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Domestic Output (GDP) is either
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Factor Incomes are spent on
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Consumed (C)
Invested (I) (INCREASE IN STOCK OF CAPITAL)
Bought by the Government (G)
Bought by the foreigners, net exports (X-M)
Consumption (C)
Saving (S)
Paying taxes net of benefits (T-B)
GDP = C + I + G + (X – M)
Factor Income = C + S + (T – B)
Since everything produced in the economy
generates equivalent factor income
Domestic Output (GDP) = Factor Incomes
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Domestic Output
Factor Incomes
C + I + G + (X – M) = C + S + (T – B)
C: Consumption
I: Investment
G: Government
Expenditure
X-M: Net exports
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C: Consumed
S: Savings
T-B: Taxes
Net of Benefits
Domestic Output
Factor Incomes
C + I + G + (X – M) = C + S + (T – B)
rearrange
I+G+X =
Total Injections
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S + (T – B) + M
Total Leakages
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Y= National Income
C = Consumption
I = Investment
G = Government Expenditure
(X-M) =Net Exports
GDP = C + I + G + (X – M)
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Gross domestic product (GDP)
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measures the output produced by factors of production located
in the domestic economy over a period of time, usually a year.
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Gross National Product (GNP)
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total income of citizens wherever it is earned
= GDP + Net Property Income (NPI)
IF GDP < NPI the citizens of the local economy are
producing less than the citizens from abroad. It means
that citizens from abroad in the local economy plus locals
make the local economy GDP smaller than its Citizens
abroad and in the local economy together GNP.
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Depreciation:
 Gross: DOES NOT TAKE IN ACCOUNT DEPRECIATION
(wear and tear of capital stock). Only the increase in
stock.
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Net National Product
= GNP – Depreciation
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Nominal GDP / GNP
Measures national output at current prices
= value of all goods at current prices
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Real GDP / GNP
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Measures output at base year prices
e.g. value of today's national output at 1995 prices
Allows us eliminate the effect of price changes and see
how real output evolves over time
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Who’s the richest?
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Does NOT take in account other variables like:
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Does not separate K or C goods.
Underground economy is not taken in account
Externalities are not taken in account.
Self consumption activities or household activities are
not taken in account.
Other issues which reflect standard of living. Education,
Health, environment, security, freedom, discrimination,
etc…
Income distribution (inequality)
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