The Circular Flow of Income

1. The Circular Flow of Income

2. What sectors make up an economy? Households Firms Government International

3. The circular flow of income The interdependence of goods markets and factor markets

4. The interdependence of goods and factor markets FIRMS (suppliers of goods and services, demanders of factor services) HOUSEHOLDS (demanders of goods and services, suppliers of factor services)

5. The interdependence of goods and factor markets £ £ Factor services Goods S S PF2 P2 PF1 P1 D2 D2 D1 D1 QF1 Q2 QF2 Q1 Factor services Goods £ £ (2) Producer supply (3) Factor demand P P Multiplier effect O O Q Q (4) Factor supply (1) Consumer demand

6. The circular flow of income Consumption, injections, withdrawals and equilibrium

7. Need 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’….

8. Consumption of domestically produced goods and services (Cd) Factor payments The circular flow of income Firms Households

9. Export expenditure (X) Investment (I) Government expenditure (G) BANKS, etc ABROAD GOV. Import expenditure (M) Net taxes (T) Net saving (S) The circular flow of income INJECTIONS Consumption of domestically produced goods and services (Cd) Factor payments WITHDRAWALS

10. Key terms… Injections = I + G + X Withdrawals = S + T + M

11. Circular Flow of Income – what if…. What if Injections* are greater than withdrawals? *Injections = I + G + X Multiplier effect

12. What if withdrawals* are greater than Injections? *Withdrawals = S + T + M

13. 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

14. National Income Measuring economic growth

15. National 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.

16. What’s the difference GDP v GNP

17. GDP 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.

18. Key Terms needed….. Real & Nominal

19. Nominal Nominal or current GDP looks at the monetary value

20. Real Real takes into account of inflation