Essentials of Economics, 3rd ed

1
The Circular Flow of Income
2
What sectors make up an economy?

• Households
• Firms
• Government
• International

3
The circular flow of income

• The interdependence of goods markets
• and factor markets

4
The interdependence of goods and factor markets
FIRMS (suppliers of goods and services, demanders
of factor services)
HOUSEHOLDS (demanders of goods and
services, suppliers of factor services)
5
The interdependence of goods and factor markets
(2) Producer supply
(3) Factor demand
P
P
Multiplier effect
O
O
Q
Q
(4) Factor supply
(1) Consumer demand
6
The circular flow of income

• Consumption, injections, withdrawals and
  equilibrium

7
Need a whole A4 page for this diagram

• Need it to be landscape
• Start off on the far left side..
• Need lots of space for the diagram to grow.

8
The circular flow of income
Firms
Households
9
The circular flow of income
INJECTIONS
Consumption of domestically produced goods and
services (Cd)
Factor payments
WITHDRAWALS
10
Key terms

• Injections I G X
• Withdrawals S T M

11
Circular Flow of Income what if.

• What if Injections are greater than withdrawals?
• Injections I G X

Multiplier effect
12

• What if withdrawals are greater than Injections?
• Withdrawals S T M

13
Government Macro Economic policies

• Look at managing injections and withdrawals to
  allow a positive economic growth of 2 per year.
• The Govt can achieve this either by
• reducing withdrawals
• or by increasing injections

14
National Income

• Measuring economic growth

15
National Growth

• National Income all incomes from FoP are added
  (from Firms to Households)
• National Product all g s produced (by firms)
• National Expenditure (AD) all expenditure on
  output is added.

16
Whats the difference

• GDP v GNP

17
GDP v GNP

• GDP measures the value of output produced within
  the domestic boundaries of the UK over a given
  time period.
• GDP includes the output of the many foreign owned
  firms that are located in the UK following the
  high levels of foreign direct investment in the
  UK economy over many years.

• GNP measures the final value of output or
  expenditure by UK owned factors of production
  whether they are located in the UK or overseas.
• Many foreign firms have set up production plants
  in the UK whilst UK firms have expanded their
  operations overseas and become multinational (or
  trans-national) organisations.

18
Key Terms needed..

• Real Nominal

19
Nominal

• Nominal or current GDP looks at the monetary
  value

20
Real

• Real takes into account of inflation