2.4 National Income

• Firms and households interact and exchange resources in an economy
• Household supply firms with the factors of production, such as labour, land, capital and enterprise, and in return, they recieve wages, rent, dividends and profit
• Firms supply goods and services to households. Consumers pay firms for these
• The spending and income circulates around the economy in the circular flow of income. Therefore, national income = national output = national expenditure
• Savings income removes it from the circular. This is a withdrawal of income. Taxes are also a withdrawal of income.
• Investing money into the economy is an injection. Also, the government spending on public and merit goods, and welfare payments, are injections into the economy.
• International trade is also included in the circular flow of income . Exports are an injection into the economy and Imports are a withdrawal from the economy
• Exports are an injection into the economy, since goods and services are sold to foreign countries and revenue in earned from the sale.
• Imports are a withdrawal from the economy, since money leaves the country when goods and services are bought from abroad
• The economy reaches a state of equilibrium when the rate of withdrawals = rate of injections
• Income is a flow of money that goes to the factors of production For example, wages, welfare payments, profits, dividends, rents and interest are forms of income
• Wealth is a stock of assets, such as savings, shares, property, bonds and pension schemes
• The full circular flow of income can be derived from this :

  
• If there are net injections into the economy, there will be an expansion of national output
• If there are net withdrawal from the economy, there will be a contraction of production, so output decreases