The Circular flow of Income

What is national income

The total value of the goods and services a country produces. It is the output in one year.

Nominal vs real gdp

Real is adjusted for inflation, nominal isn’t.

Gross national product (GNP) - definition

Market value of all products produce in a year by the labour and property supplied by the citizens of one country.

How is GNP different to GDP?

GDP is within a country’s borders. whereas GNP includes products produced by citizsens of a country, even if they are abroad.

Gross national income (GNI) - definition

Similar to GNP, includes the value of all goods and services produced by nationals, in the country or not, this also includes FDI (foreign direct investment).

Circular flow of income - definition

An economic model showing the flow of goods and services, the factors of production, and their payments between households and firms within an economy.

Circular flow of income - simple diagram

Steps in the flow of income:

1. Firms provide households with goods and services

2. Households spend their income on the goods and services produced by firms

3. Households also provide firms with factors of production: land, labour etc

   1. Firms pay for these factor markets with factors incomes : rent, wages, interest, profit.

Injection - definition

Money which enters the economy

Withdrawal - definition

Money that leaves the economy

What are injections into the circular flow?

Government spending

Investments

Exports

What are withdrawals from the circular flow?

Savings

Taxes

Imports - since money goes to other countries and leaves the economy to pay for goods and services.

What 3 ways of measuring national income are equal in the circular flow of income?

Income = expenditure = output

Value of firms’ output = their income = consumer expenditure.