The Circular Flow of Income and

Expenditure
Dr. Shivani Mohan
Assistant Professor
Economics
CNLU.
Household Government Firms
Households Government Firms
 Purchases of goods and services

Demand

Households Government Firms

 Purchases of goods and services

Demand

Household Government Firms

Supply
 Purchases of goods and services

Demand

Household Government Firms

Supply

Wages, dividends, interest, profits and rent

 Purchases of goods and services

Demand

Household Government Firms

Supply
Incomes

Wages, dividends, interest, profits and rent

 Purchases of goods and services

Demand

Household Government Firms

Supply
Incomes

Wages, dividends, interest, profits and rent

 Purchases of goods and services

Taxes
Demand

Household Government Firms

Supply
Incomes

Wages, dividends, interest, profits and rent

 Purchases of goods and services

Taxes
Demand

Household Government Firms

Supply
Incomes

Wages, dividends, interest, profits and rent

 Purchases of goods and services

Taxes
Demand

Household Government Firms

Supply
Incomes Social
Transfers

Wages, dividends, interest, profits and rent

 Purchases of goods and services

Taxes
Demand

Households Government Firms

Supply
Incomes Social
Transfers

Wages, dividends, interest, profits and rent

 Purchases of goods and services

Taxes Govt
Demand
Purchase

Household Government Firms

Supply
Incomes Social
Transfers

Wages, dividends, interest, profits and rent

 Purchases of goods and services

Taxes Govt
Demand
Purchases

Household Government Firms

Supply
Incomes Social
Transfers

Wages, dividends, interest, profits and rent

 Purchases of goods and services

Taxes Govt
Demand
Purchases

Household Government Firms

Supply
Incomes Social Taxes
Transfers

Wages, dividends, interest, profits and

rent
 Purchases of goods and services

Three sector Taxes Govt

Purchases
Demand
Model
Or
The Domestic Households Government Firms
Circular Flow

Households
Government Supply
Firms Incomes Social
Transfers
Taxes

Wages, dividends, interest, profits and rent

Production by firms generates factor incomes

 Rest of the
World

The Domestic Purchases of goods and services

Circular Flow

Households
Government Taxes Govt
Demand
Purchases
Firms

Households Government Firms

Supply
Incomes Social Taxes
Transfers

Wages, dividends, interest, profits and rent

Production by firms generates factor incomes

 Rest of the
World

Purchases of goods and services

Taxes Govt
The Domestic Purchases
Demand

Circular Flow

Households Households Government Firms

Government
Firms
Supply
Incomes Social Taxes
Transfers

Wages, dividends, interest, profits and rent

Production by firms generates factor incomes

 Imports
Rest of the
World

Purchases of goods and services

£ Taxes Govt
Demand
The Domestic Purchases

Circular Flow
Households Government Firms
Households
Supply
Government
Firms
Incomes Social Taxes
Transfers
£

Wages, dividends, interest, profits and rent

Production by firms generates factor incomes

 Imports
Rest of the
World

Purchases of goods and services

£ Taxes Govt
Demand
The Domestic Purchases

Circular Flow
Households Government Firms
Households
Supply
Government
Firms
Incomes Social Taxes
Transfers
£

Wages, dividends, interest, profits and rent

Production by firms generates factor incomes

 Imports Exports
Rest of the
World

Purchases of goods and services

£ Taxes Govt
Demand
The Domestic Purchases

Circular Flow
Households Government Firms
Households
Supply
Government
Firms
Incomes Social Taxes
Transfers
£

Wages, dividends, interest, profits and rent

Production by firms generates factor incomes

Trade balance
Imports Exports
Rest of the
World

Purchases of goods and services

Injections and
Leakages from
the Circular
Flow Taxes Govt
Demand
Purchases

Households Government Firms

Supply
Incomes Social Taxes
Transfers

Wages, dividends, interest, profits and rent

Production by firms generates factor incomes

Trade balance
Imports Exports
Rest of the
World

Purchases of goods and services

Injections and
Leakages from
the Circular
Flow Taxes Govt Demand
Purchases

Households Government Firms

Supply
Incomes Social Taxes
Transfers

Wages, dividends, interest, profits and rent

Production by firms generates factor incomes

 Imports Exports
Injections and Rest of the
Leakages from World
the Circular
Flow

Injections Purchases of goods and services

Government
Spending
Investment Taxes Demand
Exports Govt
Purchases

Leakages
Households Government Firms
Savings
Taxation
Imports
Incomes Social Taxes
Equilibrium Transfers

when Capital
Investment
injections =
leakages Wages, dividends, interest, profits and rent

Production by firms generates factor incomes

 Aggregate Demand (AD)
• Total demand for domestically-produced
goods and services = GDP
• AD = the sum of
Consumer spending (C)
+ Investment spending (I)
+ Government spending (G)
+ Exports of goods and services (X)
- Imports of goods and services (M)

2:18:10 PM
 Injections into the Circular Flow

Government
Exports (X) Investment (I)
Consumption

Goods and services sold State (public) sector Spending on capital

to consumers (buyers) in demand for goods and goods including plant &
overseas markets services e.g. health and machinery and
education infrastructure
 Leakages from the Circular Flow

Imports (M) Taxation (T) Savings (S)

Goods and services Compulsory payments Deferred spending,
bought by domestic to the government – disposable income that
consumers and direct and indirect taxes is not spent
businesses from
overseas
Injections and leakages

Exports (X) Imports (M)

Government
Taxation (T)
Consumption

Investment (I) Savings (S)

Injections and leakages
Balance of
Trade

Exports (X) Imports (M)

Government
Taxation (T)
Consumption

Investment (I) Savings (S)

Injections and leakages
Balance of
Trade

Exports (X) Imports (M)

Government
Budget
Balance

Government
Taxation (T)
Consumption

Investment (I) Savings (S)

Injections and leakages
Balance of
Trade

Exports (X) Imports (M)

Government
Budget
Balance

Government
Taxation (T)
Consumption

Balance
between
savings and
investment
Investment (I) Savings (S)
Injections and leakages
Balance of
Trade

Exports (X) Imports (M)

Government
Budget
Balance

Government
Taxation (T)
Consumption

Balance
between
savings and
investment
Investment (I) Savings (S)
 Injections and leakages
When Injections > Leakages
Exports (X) Imports (M)

Government
Taxation (T)
Consumption
Then the level of

Investment (I)
Will tend to Savings (S)
 Injections and leakages
When Injections > Leakages
Exports (X) Imports (M)

Government
Taxation (T)
Consumption
Then the level of

Investment (I)
Will tend to Savings (S)
 Injections and leakages

Exports (X) When Leakages > Injections Imports (M)

Government
Taxation (T)
Consumption
Then the level of

Investment (I)
Will tend to Savings (S)
 Injections and leakages
When Leakages >
Exports (X)
Injections Imports (M)

Government
Taxation (T)
Consumption
Then the level of

Investment (I)
Will tend to Savings (S)
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