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CHAPTER 3
Measuring the Economy
Learning Objectives:
LO1: Understand the circular flow of national income
LO2: Explain the concept of equilibrium and why
national income can rise and fall
LO3: Understand the components of GDP accounting
and be aware of some of the problems in determining
official statistics
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3-1
LO1
Circular Flow of Income
• Simplified economy with two sectors
Households
Businesses
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3-2
LO1
Circular Flow of Income
• Businesses sell goods & services to households
• Households provide factors of production to
businesses
Goods and services
Households
Businesses
Factors of production
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3-3
LO1
Circular Flow of Income
• Households pay for goods and services
• Businesses pay for factors of production
$ Consumption spending
Goods and services
Households
Businesses
Factors of production
$ Rent, wages, interest, profit
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3-4
LO1
Circular Flow of Income
Consumption
• Household spending on goods and services
Product Market
• The market for consumer goods and services
Factor Market
• The market for factors of production
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LO1
Circular Flow of Income
Product Market
$ Consumption spending
Goods and services
Households
Businesses
Factors of production
$ Rent, wages, interest, profit
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Factor Market
3-6
LO1
Circular Flow of Income
National Income: sum of all spending
OR sum of all incomes earned
$ Consumption spending
Goods and services
Households
Businesses
Factors of production
$ Rent, wages, interest, profit
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LO1
Stock vs Flow
Stock of Money
• Quantity of money at a specific point in time
Flow of Income
• Amount of income over a given period of time
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LO1
Leakages
Leakage
– Income received within the circular flow that does
not flow directly back
1. Savings
2. Taxes less transfer payments
- transfer payment: one-way transaction where payment is
made but no good or service flows back
3. Imports
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LO1
Injections
Injection
– Any spending flow that is not dependent on the
current level of income
1. Investment (on capital goods)
2. Government spending
3. Exports
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3-10
LO1
Leakages and Injections
Leakages
1. Savings
2. Taxes
3. Imports
Injections
1. Investment
2. Govt spending
3. Exports
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LO1
Saving and Investment
• Saving is that portion of income that is not
spent on consumption
• Important source of loanable funds
• The amount of savings in the economy
depends primarily on the level of incomes
Y=C+S
S=Y-C
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3-12
LO1
Circular Flow of Income
$ Consumption spending
Goods and services
Businesses
Households
Factors of production
$ Rent, wages, interest, profit
Investment
Financial
Intermediaries
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Saving
3-13
LO1
Imports and Exports
• When goods & services are imported,
Canadian payments leak out to another
country – imports are a leakage
• When goods & services are exported, foreign
payments are injected into our economy
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LO1
$ Payment
for Exports
Foreign
Sector
$ Consumption spending
$ Payment
for Imports
Goods and services
Businesses
Households
Factors of production
$ Rent, wages, interest, profit
Investment
Financial
Intermediaries
© 2012 McGraw-Hill Ryerson Limited
Saving
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LO1
Taxes and Government Spending
• Governments collect taxes from households
and businesses – which leak out of the
economy
• Tax revenues may be used for government
spending programs – which are injections
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LO1
$ Payment
for Exports
Foreign
Sector
$ Consumption spending
$ Payment
for Imports
Goods and services
Businesses
T
G
Govt
T
TP
Households
Factors of production
$ Rent, wages, interest, profit
Investment
Financial
Intermediaries
© 2012 McGraw-Hill Ryerson Limited
Saving
3-17