1. The Circular Flow of Income By the end of this lesson, you should: Remember the multiplier effect.Remember the multiplier effect. Understand the difference between injections and withdrawals.Understand the difference between injections and withdrawals. Understand how the multiplier effect can be represented diagrammatically.Understand how the multiplier effect can be represented diagrammatically. Apply the concept of the multiplier effect to different countries.Apply the concept of the multiplier effect to different countries.

3. Injections or Withdrawals? 1.Firms are forced to take a cut in profits to give a pay rise. 2.Firms spend more on R & D. 3.The government reduces income tax. 4.More people invest in ISAs and stocks and shares. 5.UK investors earn higher dividends on overseas investments. 6.The government purchases US military aircraft. 7.People use savings to finance holidays abroad. 8.People use savings to finance holidays in the UK. 9.The government increases its PSBR (Public Sector Borrowing Requirement) to fund new infrastructure projects. 10.The government funds new infrastructure projects by advising the Bank of England to increase its quantitative easing programme.

4. Cumulative Causation Model (Myrdal)

5. One person’s spending is another person’s income £300 million increase in business capital investment in an area.£300 million increase in business capital investment in an area. The business and employees increase consumption by 60%.The business and employees increase consumption by 60%.

6. One person’s spending is another person’s income £300m + (0.6 x £300m)£300m + (0.6 x £300m) £300m + £180m = £480m£300m + £180m = £480m

7. One person’s spending is another person’s income £300m + (0.6 x £300m)£300m + (0.6 x £300m) £300m + £180m = £480m£300m + £180m = £480m £300m + £180m + (0.6 x £180m)£300m + £180m + (0.6 x £180m) £300m + £180m + £108m = £588m£300m + £180m + £108m = £588m

10. Multiplier Effect vs Accelerator Effect Effect of an increase in investment upon income.Effect of an increase in investment upon income. Effects of an increase in income upon investment.Effects of an increase in income upon investment.

11. GNI as a Development Indicator CountryLife Expectancy Mean yrs schooling Expected yrs schooling GNI pc $US HDI 2010 Norway 81.012.617.358 8100.938 UAE 77.79.211.558 0060.815 Latvia 73.010.415.712 9440.769 Brazil 72.97.213.810 6070.699 China 73.57.511.47 2580.663 India 64.44.410.33 3370.519 Zambia 47.36.57.21 3590.395 Zimbabwe 47.07.29.21760.140

12. Effects upon the Circular Flow of Income 1.Norway and UAE have large SWFs (Sovereign Wealth Funds) – why? Effects on the CFoI? 2.UAE has an unusually large number of people living in poverty, which is a serious problem the government needs to address – effects on the CFoI? 3.As a former Eastern Block communist country, Latvia still maintains an excellent education system, but it manufactures very little hence its low GDP – effects on the CFoI? 4.Latvia has joined the EU and wishes to invest in manufacturing to attract orders from the wealthier EU nations – effects on the CFoI? 5.In Brazil, China and India, there is rapid industrialisation due to huge levels of inward FDI (Foreign Direct Investment) – how will the multiplier effect lead to an increase in national income? Effects on the CFoI? 6.Can you think of any negative effects of increased economic growth in Brazil, China and India? For each effect, how will the issue be resolved? 7.Zambia and Zimbabwe – what is the CFoI like for these two countries? 8.Zambia is rich in natural resources eg copper (high demand in China) – how will investment in production of copper affect the CFoI?

13. The Circular Flow of Income By the end of this lesson, you should: Remember the multiplier effect.Remember the multiplier effect. Understand the difference between injections and withdrawals.Understand the difference between injections and withdrawals. Understand how the multiplier effect can be represented diagrammatically.Understand how the multiplier effect can be represented diagrammatically. Apply the concept of the multiplier effect to different countries.Apply the concept of the multiplier effect to different countries.