The Circular Flow of Income

What sectors make up an economy? Households Firms Government International

The circular flow of income The interdependence of goods markets and factor markets

The interdependence of goods and factor markets FIRMS (suppliers of goods and services, demanders of factor services) HOUSEHOLDS (demanders of goods and services, suppliers of factor services)

The interdependence of goods and factor markets (3) Factor demand (2) Producer supply £ £ Factor services Goods P P D2 S S D2 D1 Multiplier effect D1 PF2 P2 QF2 PF1 P1 Q2 QF1 Q1 O Factor services Q Goods O Q £ £ (4) Factor supply (1) Consumer demand

The circular flow of income Consumption, injections, withdrawals and equilibrium

Need a whole A4 page for this diagram Need it to be landscape Start off on the far left side….. Need lots of space for the diagram to ‘grow’….

The circular flow of income Firms Factor payments Consumption of domestically produced goods and services (Cd) Households

The circular flow of income Export expenditure (X) INJECTIONS Government expenditure (G) Investment (I) Consumption of domestically produced goods and services (Cd) BANKS, etc Net saving (S) ABROAD Import expenditure (M) Factor payments GOV. Net taxes (T) WITHDRAWALS

Injections = I + G + X Withdrawals = S + T + M Key terms… Injections = I + G + X Withdrawals = S + T + M

Circular Flow of Income – what if…. What if Injections* are greater than withdrawals? *Injections = I + G + X Multiplier effect

What if withdrawals* are greater than Injections? *Withdrawals = S + T + M Yuk photo! Need changing

Government Macro Economic policies… Look at managing injections and withdrawals to allow a positive economic growth of 2% per year. The Govt can achieve this either by reducing withdrawals or by increasing injections

Measuring economic growth National Income Measuring economic growth

National Product = all g & s produced (by firms) National Growth National Income = all incomes from FoP are added (from Firms to Households) National Product = all g & s produced (by firms) National Expenditure (AD) = all expenditure on output is added.

What’s the difference GDP v GNP

GDP v GNP GDP measures the value of output produced within the domestic boundaries of the UK over a given time period. GDP includes the output of the many foreign owned firms that are located in the UK following the high levels of foreign direct investment in the UK economy over many years. GNP measures the final value of output or expenditure by UK owned factors of production whether they are located in the UK or overseas. Many foreign firms have set up production plants in the UK whilst UK firms have expanded their operations overseas and become multinational (or trans-national) organisations.

Key Terms needed….. Real & Nominal

Nomianal or current GDP looks at the monetary value Nominal Nomianal or current GDP looks at the monetary value

Real takes into account of inflation

Complete the task on the sheet…   current prices (1995=100) Price Index (1995=100) Real GDP (1995=100) 1995 100.0 1996 105.9 103.3 102.6 1997 112.8 106.3 1998 119.3 109.5 1999 124.8 112.0 2000 130.9 114.0

Homework… for Monday… News article – research an article from a reputable source: BBC Financial Times Guardian Independent The Times The Economist Article must be on one of the following topics… UK inflation UK employment / unemployment UK interest rates UK economic growth Analyse the key issues raised in the article.