The Circular Flow of Income
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Transcript of The Circular Flow of Income
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The Circular Flow of Income
The Circular Flow of Income
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What sectors make up an economy?What sectors make up an economy?
HouseholdsFirmsGovernmentInternational
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The circular flow of incomeThe circular flow of income
The interdependence of goods markets
and factor markets
The interdependence of goods markets
and factor markets
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FIRMS(suppliers of goods and services,
demanders of factor services)
HOUSEHOLDS(demanders of goods and services,
suppliers of factor services)
The interdependence of goods and factor marketsThe interdependence of goods and factor markets
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Q1
P1
QF2
PF2
Q2
P2PF1
QF1
D2D2
The interdependence of goods and factor marketsThe interdependence of goods and factor markets
P
Q
P
Q
££ ££
££££
Factorservices
Goods
GoodsFactor
services
S S
D1 D1
(1)Consumer
demand
(1)Consumer
demand
(4)Factor supply
(4)Factor supply
(3)Factor
demand
(3)Factor
demand
(2)Producer
supply
(2)Producer
supply
OO
Multiplier effect
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The circular flow of incomeThe circular flow of income
Consumption, injections, withdrawals
and equilibrium
Consumption, injections, withdrawals
and equilibrium
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Need a whole A4 page for this diagramNeed a whole A4 page for this diagram
Need it to be landscape
Start off on the far left side…..
Need lots of space for the diagram to ‘grow’….
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Factorpayments
Factorpayments
Consumption ofdomestically
produced goodsand services (Cd)
Consumption ofdomestically
produced goodsand services (Cd)
The circular flow of incomeThe circular flow of income
Firms
Households
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Factorpayments
Factorpayments
Consumption ofdomestically
produced goodsand services (Cd)
Consumption ofdomestically
produced goodsand services (Cd)
Investment (I)Investment (I)
Governmentexpenditure (G)
Governmentexpenditure (G)
Exportexpenditure (X)
Exportexpenditure (X)
BANKS, etc
Netsaving (S)
Netsaving (S)
GOV.
Nettaxes (T)
Nettaxes (T)
ABROAD
Importexpenditure (M)
Importexpenditure (M)
The circular flow of incomeThe circular flow of income
WITHDRAWALS
INJECTIONS
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Key terms…Key terms…
Injections = I + G + X
Withdrawals = S + T + M
Injections = I + G + X
Withdrawals = S + T + M
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Circular Flow of Income – what if….Circular Flow of Income – what if….
What if Injections* are greater
than withdrawals?
*Injections = I + G + X
Multiplier effect
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What if withdrawals* are greater
than Injections?
*Withdrawals = S + T + M
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Government Macro Economic policies…Government Macro Economic policies…
Look at managing injections and withdrawals to allow a positive economic growth of 2% per year.
The Govt can achieve this either by
reducing withdrawals
or by increasing injections
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National IncomeNational Income
Measuring economic growth
Measuring economic growth
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National GrowthNational Growth
National Income = all incomes from FoP are added (from Firms to Households)
National Product = all g & s produced (by firms)
National Expenditure (AD) = all expenditure on output is added.
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What’s the differenceWhat’s the difference
GDP v GNPGDP v GNP
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GDP v GNPGDP v GNP
GDP measures the value of output produced within the domestic boundaries of the UK over a given time period.
GDP includes the output of the many foreign owned firms that are located in the UK following the high levels of foreign direct investment in the UK economy over many years.
GNP measures the final value of output or expenditure by UK owned factors of production whether they are located in the UK or overseas.
Many foreign firms have set up production plants in the UK whilst UK firms have expanded their operations overseas and become multinational (or trans-national) organisations.
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Key Terms needed…..Key Terms needed…..
Real & Nominal Real & Nominal
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NominalNominal
Nominal or current GDP looks at the monetary value
Nominal or current GDP looks at the monetary value
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Real Real
Real takes into account of inflation
Real takes into account of inflation