Circular Flow of Income

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Circular Flow of Income • • • • • • • • Y C S I T G M X = = = = = = = = Income Consumption Expenditure Savings Investment Taxation Government Expenditure Imports Exports 2 .

Circular Flow .Simple Income Resources Consumers Goods and Services Producers Consumption Expenditure 3 .

Simple • Assumptions: – – – – Only two sectors .Circular Flow . capital and enterprise 4 .Consumers and Producers All production is sold to the consumers Producers provide all the Goods and Services Consumers spend all their Income on goods an services – No government and no overseas sectors – Consumers are the owners of productive resource land. labour.

Circular Flow of Income • Note: • Total Output = Total Income = Total Expenditure • O = Y = E 5 .

Circular Flow Savings and Investment Y Consumers C Producers S Capital Market I 6 .

Circular Flow Savings and Investment • • • • • • Y = O = Y = C+S = Therefore S = C+S C+I O C+I I 7 .

Government Sector Y Consumers TAXATION TAXATION Producers GOVERNMENT SPENDING SUBSIDIES C S CAPITAL MARKET I 8 .Circular Flow .

Government Sector • • • • • • • • Y = C + I + T for equilibrium S + T = I + G if S + T > I + G then the level of income will fall S + T < I + G then the level of income will rise 9 .Circular Flow .

Four Sectors Y Consumers C LEAKAGES Producers CAPITAL MARKET T M GOVERNMENT G OVERSEAS SECTOR X 10 INJECTIONS S I .Circular Flow .

Circular Flow .M) • also known as Aggregate Demand • Equilibrium is achieved when Total Leakage = Total Injections: •S + T + M = I + G + X 11 .Four Sectors • National Income is determined by total expenditure: •C + I + G + (X .