Circular Flow of Income

MACRO

National Income

Value of the final g/s produced by residents of a country in a given time period, in a year commonly

Circular Flow of Income

shows flow of income and expenditure between different sectors

firms, households, govt. and foreign sectors

when circular flow becomes larger, national income increases

Closed Economy

Assumpt.

• made up of economic agents (households and firms)

• households spend ALL their income on g/s produced by firms

• firms spend ALL revenue on FoP’s owned by households

Households

• Owner(s) of the 4 FoP’s

• Sell FoP’s to receives factor incomes

this leads to:

• these factor incomes allow households to spend on g/s

FoP’s and their incomes

• Land: gift of nature/ natural resources not created by human effects

RENT

• Capital: includes tools, equipment, and factories used in production

INterest

• Labor: includes people with all their efforts

WaGes

• Entrepreneurs: individuals that start new business/brings a product to a market

ProfitS

Injections

additions to investment, government spending or exports so boosting CFI leading to a multiplied expansion of output of production

Withdrawals

are increases in savings, taxes or imports so reducing the CFI and leads to multiplied contraction of outputs

LHS - Withdrawals (S, T, I)

W = S + T + M

RHS - Injections (I, G, E)

J = I + G + X