2 - circular flow of income

circular flow of income

• simple model of the economy

• no government (only firm/households)

factor market

• households provide FOPs

• firms provide factor incomes (rewards)

product market

• households provide consumption

• firms provide goods + services

leakages

• when money flows out of the CFoI

• tax, imports, savings

injections

• when money flows into the CFoI

• government expenditure, firm investment, exports

if injections = leaks

output doesnt change - macroeconomic equillibrium

if injections greater than leaks

gdp increases

if injections less than leaks

gdp decreases

way of measuring GDP: output

total value of goods and services

way of measuring GDP: income

everyone in the countries income

way of measuring GDP: expenditure

what everyone in the country spent

how does output, income, and expenditure relate?

O = I = E