1.4.2.1 The circular flow of income

• What national income measures. • The difference between nominal and real income. • Real national income as an indicator of economic performance. • The circular flow of income concept, the equation income = output = expenditure, and of the concepts of equilibrium and full employment income. • The difference between injections and withdrawals into the circular flow of income. • The effect of changes in injections and withdrawals on national income.

What is national income?

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

How can national income be measured?

GDP, GNP, GNI

The value of GDP adjusted for inflation

the value of GDP adjusted for inflation

What is nominal GDP?

It is the value of GDP without being adjusted to inflation.

What is GNP (Gross National Product)?

GNP (Gross National Product) measures the total value of goods and services produced by individuals and businesses from a country within a year regardless of whether the individual or business is operated within that country.

What is GNI (Gross National Income)?

The sum of the value added by all producers who live in a nation, plus product taxes (without subsidies included), plus receipts of primary income.

What is the circular flow of income?

Demonstrates how money moves around the economy via producers and households in an endless loop

What do households supply?

Factors of production

What do households receive from firms?

Wages and dividends

What do firms supply to households?

Goods and services

What is the definition of withdrawals?

These are actions which take money out of the circular flow

What are withdrawals?

Imports
Taxes
Saving

What is the definition of an injection?

Spending that puts money into the circular flow of income.

What are injections?

Investments
Government spending
Exports

What is full employment income?

Full employment income is the total output of an economy when unemployment is minimised or is at the government target. This accounts for frictional unemployment.

How are firms rewarded from households?

Through consumer spending

Income = =

Income = output == expenditure

When is the economy in equilibrium?

When leakages = injections

What happens when there are net injections into an economy?

There will be an expansion of national output

What happens if there are net withdrawals in an economy?

There will be a contraction of production, so output decreases.