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Circular flow

Circular flow. Injections – money added to the circular flow that leads to growth e.g. investment, export earnings, government spending

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Circular flow

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  1. Circular flow • Injections – money added to the circular flow that leads to growth e.g. investment, export earnings, government spending • Withdrawals (leakages) – money taken from the circular flow that reduces growth e.g. savings, import payments and government taxation e.g. GST, Income tax, petrol tax

  2. Changes in injections or withdrawals can lead to changes in growth rates E.G. • Tax cuts can lead to more disposable income which leads to more savings therefore more investment. • Global changes can impact on export demand/ receipts or import payments. • The Government cuts jobs in public sectors like health, education to reduce government spending.

  3. Governments aim to steady the bumps out to gain Potential GDP GDP changes Investment requires Business confidence Suitable interest rates Stable government that has low inflation, educated workers, incentives to invest Which leads to research and development, new projects, efficient methods to use resources and new technology

  4. Business cycle or Trade cycle A= Peak or Boom B= Recession or downturn C = Depression D = Recovery or upswing

  5. Business cycle Good times (Peak or Boom) Bad times (recession or downturn or depression) Low business and consumer confidence Sales are low as consumers save instead of spending due to uncertainty in job market Unemployment as firms cut staff or do not rehire when people leave. • Firms invest in capital goods • Hire more staff • Produce more goods • Consumers demand more due to more income • Businesses take more risks as more confidence in the economy

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