2.4.1 National Income

• Circular flow of income

  Firms and households interact and exchange resources in an economy
• Circular flow of income

  1. Households supply firms with factors of production (labour, capital)

  2. Firms pay households (wages, dividends)

  3. Firms supply goods and services to households

  4. Households pay firms for goods and services
• Spending and income circulates around the economy in the circular flow of income
• Saving income


  Removes it from the circular flow, a withdrawal of income
• Taxes


  A withdrawal of income from the circular flow
• Government spending on public/merit goods, welfare payments

  Injections into the economy
• Exports


  An injection into the economy, goods/services sold to foreign countries
• Imports


  A withdrawal from the economy, goods/services bought from abroad
• Economy reaches equilibrium


  Rate of withdrawals = rate of injections
• Income


  Flow of money to factors of production (wages, welfare, profits, dividends, rents, interest)
• Wealth

  Stock of assets (savings, shares, property, bonds, pension schemes)
• The full circular flow of income can be derived from this