Circular Flow of Income AS Economics

The circular flow (simple)

National Income 3 ways to measure NI Output (O) – the value of the goods from firms to households Expenditure (E) – the value of spending on goods and services Income (Y) – the value of income paid by firms to households in return for land, labour and capital

As these 3 ways of measuring the same thing then they must be identical therefore: O = E = Y

Injections and withdrawals Every economy will have injections and withdrawals where money is being injected into the circular flow and being withdrawn from it What flows could withdraw from or inject into the circular flow?

Injections These do not come from households but inject into the circular flow: – Government spending – Investment (by firms) – Exports (foreigners buying UK goods and services)

Withdrawals This is when spending does not flow back to households Savings – households, and firms, save money which takes out from the circular flow Imports – bought by households and firms and this money flows abroad Taxes – takes money from the circular flow to the government

CF – with injections and withdrawals Government Spending Investment Exports Savings Imports Taxes Withdrawals Injections GIE SIT

Effect on equilibrium If injections = withdrawals then….. If injections > withdrawals then…… If injections < withdrawals then…..

Effect on equilibrium If injections = withdrawals then there is no change If injections > withdrawals then national income rises If injections < withdrawals then national income will fall