2.1-The Circular Flow of Income

What is the national income?

•The monetary value of the flow of output produced in an economy over a period of time

•Increased injections increase national income

•Increased withdrawals decrease national income

What is the financial sector?

•Not all income is spent (injection); some is saved (withdrawal)

•The financial sector lends income saved to businesses to invest

What is the government sector?

•Some income is taken out of the flow as tax (withdrawal)

•The government sector also spends (injection) which injects income into the flow

What is the foreign sector?

•Some income flows out to other countries when imports (withdrawal) are purchased

•Exports (injection) add to the flow of income because income comes in from outside the economy

What are injections?

•When money is added to the circular flow of income, it can lead to economic growth for example:
•Investment (I)
•Government consumption (G)
•Exports (X)

What are withdrawals?

•When money is removed from the circular flow of income, which can lead to economic contraction for example:
•Savings (S)
•Taxation (T)
•Imports (M)

What are households?

Those who own the productive resources of the nation, which they exchange for rent, wages, interest, and profit; they use income earnt to buy goods/services

What are firms?

Those who hire the resources as inputs to use them to produce output; they sell the goods and services produced to households

Why is national income=national expenditure=national output

Because national income can be measured as any point as income flows round the economy

What is national income equilibrium?

When planned injections=planned withdrawals

Analyse the factor incomes

• Capital: Interest

• Enterprise: Profit

• Land: Rent

• Labour: Wages/Salaries

Analyse why output = income = expenditure

For example, your spending on a cricket bat is equal to the price of it, where the spending flows to the shop owner as income for them