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The Circular Flow of Income Five-sector Model

The Circular Flow of Income Five-sector Model



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Published by SamPetherbridge
The Circular Flow of Income Five-sector Model
and Income and expenditure Analysis
The Circular Flow of Income Five-sector Model
and Income and expenditure Analysis

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Published by: SamPetherbridge on Mar 20, 2010
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The Circular Flow of Income Five-sector Model
(Y)(C)(S) (I)(T) (G)(M)(X)
       I     n       j     e     c       t       i     o     n     s       L     e     a       k     a     g     e     s
This can also be represented as a equation:Y = O = E = C + I + G + X - MWhere:Y = Total incomeO = Total output (GDP)E = Total expenditure (Used in Australia to calculate GDP)C = Consumption expenditureI = Investment expenditureG = Government expenditureX = Expenditure on exportsM = Expenditure on imports
Circular Flow ModelModel of the economy, based on income flows from one sector ofthe economy to another in a circular motion, which explains levelsof national income and output and how changes in these occur.EquilibriumBalances situation from which there is no tendency to change, for examplethe level of output or income brought about by conditions in an economy.
Saturday, 20 March 2010
ExpenditureOutflows of money from one sector of an economy to another.IncomeInflows of money to one sector of an economy from another.InjectionsInflow of income into the circular flow of income.LeakageOutflow of expenditure from the circular flow of income.OutputProduction of goods and services in an economy from combining land, labour,capital and enterprise.
Methods of Measuring Total Production
Production MethodIncome-received MethodExpenditure method (said to be most accurate)
Equilibrium in the Circular Flow
In the two sector model (households and businesses) the economy would always bein equilibrium.If we add the financial sector, some money leaks out out and some is injected. Tohave equilibrium savings have to equal investment [S=I].I a five sector model, to achieve equilibrium we require S+T+M=I+G+XChanges in any one of the variables will bring changes in the total deistic productionand income.The level of production will change of the equilibrium is changed.
Business and Trade Cycle
Saturday, 20 March 2010
Economic Objectives and Macro-Economic Performance
Economic growth (sustainable)Price stabilityFull employmentExternal balanceHigh standard of living
Usefulness of the Circular Folw
Enables us to gain a simplified picture of the Australian economy
Income and expenditure Analysis
Economic theory based on the ideas of John Maynard KeynesAnalyzing and understanding the macro-economic forces that determine aggregatedproduction, income and employment and providing ways of managing economicactivity during a recession or depression through demand management.Link between income, expenditure, production (Y = O = E)The predicted level of GDP is the equilibrium level, which could be expressed by theequation Y = C + I + G + X - MNot about how people earn but how they spend their incomeIf all income is getting Spent then the economy is in equilibrium, but is not nessarilyperforming at its full employment potentialAggregate Demand (E) = C + I + G + X -MChanges in Aggregate Demand will result from changes in various expenditure flows.Aggregate - Whole economy
Can consume more than they earn/produceBreak even - where all income is spent on consuptiponProduce more than you need to consume (wealth)Economy where Aggregate Demand > level of production
stimulate level ofproduction to rise incomeWhen Aggregate Demand < OutputProfits fallStocks of unsold goods rise
Saturday, 20 March 2010

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