Circular flow of income

Circular flow of income

Illustrates how money moves through an economy, highlighting interactions between households and firms.

Factors of production

The inputs (CELL: Capital, Entrepreneurship, Land, Labor) that households provide to firms.

Factor incomes

Payments made by firms to households for the factors of production, such as wages.

Expenditure method

Calculating national output by summing all factor incomes spent on goods and services.

Output method

Determining national output by measuring the total production of all goods and services.

Income method

Calculating national output by summing all factor incomes earned.

Real GDP

The total value of all goods and services within a country, adjusted for inflation.

Leakages

Money that exits the circular flow; includes savings, imports, and taxation. (SIT)

Injections

Money that enters the circular flow; includes government spending, investment, and exports. (GIX)

Economic expansion

Occurs when injections are greater than leakages, leading to growth in Real GDP.

Economic contraction

Occurs when leakages are greater than injections, leading to a decrease in Real GDP.

Fluctuations in Real GDP

Changes in the economy's output caused by the balance of leakages and injections.