Aggregate demand and circular flow of income

• Circular flow of income - flow of goods and services, factors of production and payment between firms and households in an economy.
• Nominal national income - the total value of goods and services produced within a nation at current prices.
• Closed economy - economy that does not sell or buying goods from outside.
• Withdrawals from circular flow of income : tax by government, savings, import, investment made by households
• Injections in circular flow of income: Exports, investment made by firms, spending of governments.
• C + I + G +(X - M)

  1)C - consumer

  2)I - investment(firms)

  3)G - government

  4)(X - M) - net export
• aggregate demand - the total demand for all goods and services in an economy at any given price levels over periods of time.
• aggregate supply - the total supply for all goods and services in an economy producers are willing and able to supply at any given price level over period of time.
• SRAS - short range aggregate supply.
• LRAS - long run aggregate supply
• Real National Output = Quantity

  Price Level = Price(on supply and demand graph)
• Marginal Propensity to consume - how likely is individual to consume or save an extra £1 of income they receive.
• MPC = change in Consumption/change in income
• Marginal propensity to save - have inverse relationship with MPC, meaning how much consumer are likely to save with 1£ extra added to salary.
• HHFCE - household final consumption expenditure, estimates yearly households spending on goods and services. In 2022-2023 in Uk it was 567£ per week.
• Types of spending:

  1)durable - spendings on vehicles, communication etc.

  2)non-durable - include food, drinks, and housing maintenance.

  3)semi-durable - include clothing, footwear, household appliance.
• Net export - difference between exports and imports.
• Net export affected by:

  1)Productivity - how much goods does country produce

  2)Exchange rate - currency

  3)Extensive free trade - any policies that restrict free trade.

  4)Economic growth of other countries.
• Exchange rate: example GBP to Euro

  1)when GBP increased in exchange to Euro, this will mean its now cheaper to by from Europe for Britain, this will lead to Import growing and Net Export falling

  2)when GBP falling in exchange to Euro, it now becomes cheaper for Europe to import from UK and therefore Export value for Britain will grow and Net Export rise.
• Accelerator effect - idea that increase in demand or economic growth could be proportional to larger increase in investment by business. Firms make investment to meet demand d and expand.
• Multiplier effect - occurs when an initial injection into economy or circular flow of income causes larger final increase in the levels of real national income/output.
• SRAS shifts if there's change in cost of production. For example price of raw materials, taxes, wages for workers, productivity, exchange rate.
• LRAS is about factors of production and change in them.
• SRAS is about cost of production, therefore change in cost of each factor of production