Circular Flow Of Income Flashcards
Circular flow of income
Shows flows of goods and services and incomes to factors of production
Injections
- Investment spending (I)
- Government spending (g)
- Exports of goods and services (x)
Withdrawals
Increases in savings, taxation and imports that reduce the circular flow of income leading to a multiplied contraction of production (output)
- Savings (s) - put aside for future spending
- Taxation (T) - paid to the government
- Imports (I) - Spend on foreign - made goods and services
Equilibrium
Rate of injections = rate of withdrawals
- A rise in net injections will lead to an expansion of national output and income
- A rise in net withdrawals will lead to a contraction of national output and income
Nominal GDP
Is the value of the national output of goods and services measured at current prices,
- value measurement
Real GDP
Involves taking inflation into account - GDP is measured in constant prices.
- Volume measurement.
Real GDP per capita
Real income per head of population expressed at constant prices
Real disposable income
Income after deduction of taxes and benefits, and adjusted for the effects of inflation
GNI - gross national income
GDP plus net property income from overseas
- Remittance money transfers are included in GNI (money sent from one country to another eg. Person working in HIC may send money to family in LIC)
Basic model
Saving and investment into circular flow model
Government and overseas sectors into model
The multiplier effect
The multiplier effect occurs when an initial injection into the circular flow causes a bigger final increase in real national income.
- This injection of demand might come for example from a rise in exports, investment or government spending.
