Edexcel Economics 2.4

What are the injections into the circular flow of income? (3)

• Investment(I)

• Exports(X)

• Government spending(G)

What are the leakages/withdrawals in the circular flow of income? (3)

• Savings(S)

• Taxation(T)

• Imports(M)

What do firms give households in the circular flow of income?

• Goods and services

• Wages, rent, interest and profit

What do households give firms in the circular flow of income?

• Consumer spending

• Capital, enterprise, land and labour

Income

A flow of money going to factors of production

Real value

Nominal value/current price index*100

Equilibrium national income

When injections = leakages

Causes of an inward shift of the LRAS (4)

1. Damaging effects of natural effects

2. Destruction/loss of factor inputs

3. Large scale migration

4. Ageing population

Multiplier effect

When a change in injections leads to a more than proportional increase in real GDP.

Total change in real GDP = injection x multiplier

Formula for multiplier (closed economy no government)

Multiplier = 1 / MPS

Multiplier = 1 / (1 - MPC)

Formula for multiplier (open economy)

Multiplier = 1 / (MPS+MPT+MPM)

Marginal propensity to consume(MPC)

The proportion of an additional unit of disposable income that a household or individual spends on consumption rather than saving.

Marginal propensity to save(MPS)

The proportion of an additional unit of disposable income that is saved rather than spent on goods.

Change in total savings / change in gross income