2.4.1 National income

CIRCULAR FLOW OF INCOME- 2 SECTOR ECONOMY

• two-sector economy: w/ just households and sellers

• households- own all wealth and resources so provide the firms with land, labour and capital in return for rent, wages, interest and profits

• use this money to buy g and s produced by firms

• money (represented by green arrows) flows in one direction and goods, services and FOPs (orange arrows) flow in another

• three ways of measuring the level of economic activity:

  • national output- value of the flow of g and s from firms to households

  • national expenditure- value of spending by households on g and s

  • national income- of income paid by firms to households in return for FOPs

• In this simple model

  • national output=national expenditure=national income

CIRCULAR FLOW OF INCOME- ACTUAL ECONOMY

• two-sector model too simplified to show actual economy

• gov needs to be added: take money out of the economy through taxation (T) and add money by spending (G)

• if G>T, it can increase the flow of income

• financial services added who can inject money through investment (l) and take money away when consumers or producers save (S)

• foreign markets added as foreigners buy British goods so exports (X) add money to the flow but British people want to buy foreign goods so imports (M) take money away from the flow

• diff between the level of imports and exports is balance of trade

INCOME AND WEALTH

• INCOME- flow of assets

• WEALTH- stock of assets

• wealth is things people own (e.g. houses)

• income is the money they receive (e.g. money from jobs)

• countries w/ high levels of wealth tend to have high levels of income

• but theres not a perfect correlation between them

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