Macroecons: 2.4.1/2.4.2 - National Income

Define circular flow of income

• Model of the economy of how income moves around various systems

  

Define central flow of income

• The main part of the economy which measures the flow income between households and firms

  

Define leakages

Income that flows out from the central flow

Define injections

Income that adds to and increases the central flow

Define factor incomes and how firms pay for them

• Income derived from factors of production

• Land = rent

• Labour = wages

• Capital = interest

• Enterprise = profit

  

income is

money received through work or financial investment

Wealth is

• Total value of the assets one owns

  

5 sectors of circular flow of income

• Households

• Banks

• Governments

• International

• Firms

  

8 flows of circular flow of income + goes from where to where

• 2 flows between households and firms

  • Spending on GS

  • Factor incomes (e.g. wages)

• 6 flows that involve banks, govts, international

  • Investments (banks to firms, injections)

  • Saving (households to banks, withdrawal)

  • Export spending (international to firms, injection)

  • Import spending (households to international, withdrawal)

  • Taxation (households to governments, withdrawal)

  • Govt spending (governments to households, injection)

    

National income is

the amount of income in the central flow

If incomes are greater than withdrawals, nat income will

increase

If withdrawals are greater than incomes nat income will

decrease

Draw circular flow of income diagram

Households provide

Factors of production

Investment, not financial investment, means

The buying of new capital goods by firms