Circular Flow of Income, Expenditure and Output

Components of AD:

1. Private consumption Expenditure (C)

2. investment expenditure (I)

3. government expenditure (g)

4. Net exports

AD = C + I G (X-M)

Leakages of the circular flow of income:

the household income from working in the firms are savings, imports and taxes

Injections of the circular flow of income:

the household expenditure are injected by investments, exports, government spending

What is the circular flow?

the economy is made up of economic agents.

Households→ provide factors of production

firms→ produce goods and services

Two flows happen at the same time

Real flow:

Households → labour/resources → firms

firms → goods and services → households

Money flow:

firms → wages/rent/dividends → households

Households → spending → firms

so income keeps moving around the economy

Equilibrium is when the withdrawals are equal to the injections