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Title:

The Circular Flow of Income

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Title: Macroeconomics Author: Rebecca Meredith Last modified by: Dawgen Created Date: 7/5/2008 4:34:28 AM Document presentation format: On-screen Show (4:3) – PowerPoint PPT presentation

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Title: The Circular Flow of Income


1
The Circular Flow of Income
2
Assuming economy consist of two sector
FIRMS (suppliers of goods and services, demanders
of factor services)
HOUSEHOLDS (demanders of goods and
services, suppliers of factor services)
3
Logic The circular flow of income
Firms
Households
4
The interdependence of goods and factor markets
Producer supply
Factor demand
P
P
O
O
Q
Q
Factor supply
Consumer demand
5
Circular Flow Between Firms and Households (real
resources)
Goods and services
Households
Firms
FOP Input
6
Circular Flow Between Firms and
Households (corresponding flow of payments)
Spending on goods and services
Households
Firms
FOP incomes
7
Circular Flow Between Firms and Households
Expenditure
Goods and services
3 ways of measuring the economic activity in the
economy
Households
Firms
Services of productive factors
Factor incomes
8
Three measures of national output
  • Expenditure
  • Income
  • Output

9
Measuring Output
  • Total value added
  • Gross domestic product (GDP)

10
Circular Flow Between Firms and Households
Spending on goods and services
Leakages
Households
Firms
Factor incomes
11
Leakages from the Circular Flow
  • Leakages - money paid to the households but not
    returned to firm

12
Circular Flow Between Firms and Households
Spending on goods and services
Injections
Households
Firms
Factor incomes
13
Injections into the Circular Flow
  • Injections - are revenue for firms not from sales
    to household

14
The Circular Flow of Income with Government and
Foreign Trade
  • Government
  • Goods Services (G)
  • Transfer Payments (B)
  • Taxes (T)
  • Foreign Sector
  • Export (X)
  • Import (M)

15
The Circular Flow of Income in Symbols
  • Domestic Output (GDP) is either
  • Consumed (C)
  • Invested (I)
  • Bought by the Government (G)
  • Bought by the foreigners, net exports (X-M)
  • Factor Incomes are spent on
  • Consumption (C)
  • Saving (S)
  • Paying taxes net of benefits (T-B)

16
The Circular Flow of Income in Symbols
  • GDP C I G (X M)
  • Factor Income C S (T B)
  • Domestic Output (GDP) Factor Incomes

17
The Circular Flow of Income in Symbols
  • Domestic Output

Factor Incomes
C I G (X M)
C S (T B)

C Consumption I Investment G
Government Expenditure X-M Net exports
C Consumed S Savings T-B Taxes
Net of Benefits
18
The Circular Flow of Income in Symbols
Factor Incomes
  • Domestic Output

C I G (X M)
C S (T B)

rearrange
19
Figure Showing how a Circular Flow of Income
function (sources from Wikipedia)
20
Useful Resources
  • http//en.wikipedia.org/wiki/Circular_flow_of_inco
    me

21
THE END (
Rebecca Dawgen
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