Circular flow of income

• Income

  Measures the flow of money a person or economy receives each year
• Wealth

  The sum or stock of all of your assets added up
• Circulalar flow of income

  Firms buy factors of production from households e.g land or labour and in return they pay hosueholds factor incomes e.g wages or rent

  Households then spend the factor incomes at firms in exchange for goods and services.
• Income = Expenditure = Output

  Everything that households spend is equal to the factor incomes they are paid by firms.

  Expenditure is equal to output as all the expenditure that households spend is on what firms produce (output)
• Why we measure national output

  National income = National expenditure = National output

  therefore, by measuring one you know the others, National output is the easiest to measure as bussiness keep track of output
• Examples of leakages (withdraws) in an economy

  Saving lead to leakages as it is money not being spent.

  Importing leads to leakages as money doesn't stay within the country.

  Tax leads to leakages as the money goes to the government and is not spent
• Injections

  Money that enters the circular flow of income
• Examples of injections

  Governemnt spending leads to injections as the governemnt may spend money on education, healthcare or workers.

  Exports leads to injections as money from abroad comes into the economy from foreign consumers.

  Investment leads to injections by banks lending savings to other people.
• Leakages/Withdraws

  Money that exits the ciruclar flow of income
• Differences in injections and leakages

  When Leakages > Injections The economy must be shrinking

  When Injections >Leakages The economy must be growing