Booklet 3 - Circular flow and Economic growth

• Reward for Land is Rent
• Reward for Labour is wages
• Reward for Capital is interest
• Reward for enterprise is profit
• Rent+Wages+Capital+Profit= National income
• Firms use the four factors to make goods and services. Therefore the value of all this production = National output
• The money value of what a household spends = National expenditure
• National Output=National input= National expenditure
• if injections (government spending)= withdrawals (tax), national income does not need to change as we are producing what we are selling
• (I)- Investment
• (T)- taxes
• (S)- Saving
• (G)- Government spending
• The 5 sectors of the economy include:

  • Households
  • Government
  • Firms
  • Financial Sector
  • Other countries
• the Circular flow model measures how money flows around the economy. (Income=Expenditure=Output)
• • This diagram shows:
  • Simplified economy
  • no withdrawals
  • no injections

  
• Injection = (I) investment + (G) Government spending + (X) Exports
• Withdrawal = (M) Imports + (T) Taxes + (S) Savings
• For equilibrium of the circular flow to take place Injections must equal withdrawals
• Budget deficit = Government spending is greater than revenue from taxation. Therefore causing the GDP to rise
• If Exports > Imports then it’s an injection into the circular flow
• If Imports> Exports then its a withdrawal from the circular flow
• The multiplier effect is where an increase or decrease in spending leads to a larger than proportionate change to the national income
• Multiplier= 1/mpw (Marginal propensity to withdraw)
• margin propensity to withdraw- every pound received what % is going to be spent on what
• mpw= MPS+MPT+MPI or 1/(1-mpc)
• (MPC)/Marginal propensity to Consume - Proportion of each additional £ received in income that is spent on Uk goods + services
• MPS - Marginal Propensity to Save- Proportion of each additional £ received in income that is saved
• MPM- Marginal Propensity to import- Proportion of each additional £ received in income that is spent on imports
• MPT - Marginal Propensity to Tax- Proportion of each additional £ received in income that is paid as tax
• Income (Y)
• National income measures the monetary value of the flow of output of goods and services produced in an economy over a period of time
• Measuring the level and rate of growth of national income (Y) is important for seeing:

  • The rate of economic growth
  • changes to average living standards
  • distribution of income between groups
• Gross domestic product (GDP) is the total value of output in an economy over one year.
• GDP includes the output of foreign owned businesses
• To calculate GDP-

  1. GDP = C + I + G + (X-M)
  2. Income+ Profit+Rent (factor incomes)
  3. add together value of output
• Gross National Income (GNI) measures the final value of incomes flowing to UK owned factors of production. (In Uk OR abroad)
• Gross Domestic Income (GDI) is concerned only with incomes generated within geographical boundaries of a country )
• GNI = GDP + Net property income from abroad (NPIA)
• NPIA is the net balance of interest ,profits and dividends (IPD) coming from assets overseas matched against the flow of profits and other income from foreign owned assets within the Uk