1. The Circular Flow of Income

2. Assuming economy consist of two sector:
FIRMS
(suppliers of goods and services,
demanders of factor services)
HOUSEHOLDS
(demanders of goods and services,
suppliers of factor services)
Firms: Suppliers of goods and services, and demanders of factor services. For example the taiwan beer company supplies taiwan beer therefore they need to hire a bunch of workers to help run the factory.
Households, this is us lot the demanders of goods and services, for example an irony, construction workers have the demands of house to stay they are also wanted by companies that builds house

3. Logic: The circular flow of income
Firms
Factor
payments
Consumption of
domestically
produced goods
and services
By Assuming the basic of the circular flow of income with only two sector and without the interference of overseas sector, government sector and financial sector. The circular flow of income should look like this.
Factor payments- Payments made to scarce resources, or the factors of production (labor, capital, land, and entrepreneurship), in return for productive services. In this case it is the wages paid to the construction workers
Households

4. The interdependence of goods and factor markets
demand
Producer
supply
Factor
services
Goods P P D2 S S D2 D1 D1
PF2 P2
QF2
PF1 P1 Q2
QF1 Q1 O
Factor
services Q
Goods O Q
Factor
supply
Consumer
demand
fig

5. Circular Flow Between Firms and Households (real resources)
Goods and services
Households
Firms
FOP Input:
Household includes workers, managers, entrepreneurs etc.

6. Circular Flow Between Firms and Households (corresponding flow of payments)
Spending on
goods and services
Households
Firms
FOP incomes

7. Circular Flow Between Firms and Households
Expenditure
Goods and services
3 ways of measuring the economic activity in the economy
Households
Firms
Services of
productive factors
Factor incomes

8. Three measures of national output
Expenditure
Income
Output
Expenditure
the sum of expenditures in the economy,Money spent by an individual, business or government for any purpose.
Income
the sum of incomes all factor incomes : Factor incomes comprises compensation of employees by, and operating surplus of, producers.
Output
the sum of output (value added) produced in the economy
All three approaches are should give you the same final figure for national output
The total value of goods and services produced by an economy in a specified time period. Also known as GDP
GDP - Value of all goods and services produced in a country in one year.

9. Gross domestic product (GDP)
Measuring Output
Total value added
Gross domestic product (GDP)
Total value added
is the economy’s net output after deducting goods used during production
to avoid double counting
E.g. egg, milk, flour used for making muffins. MUFFINS. Final Good.
Gross domestic product (GDP)
measures the output produced by factors of production located in the domestic economy over a period of time, usually a year
Value of all goods and services produced in a country in one year.

10. Circular Flow Between Firms and Households
Spending on
goods and services
Leakages
Households
Firms
Factor incomes

11. Leakages from the Circular Flow
Leakages - money paid to the households but not returned to firm
Or flow of payments that started from firms but did not return back to firms
e.g. household savings, net taxes and imports

12. Circular Flow Between Firms and Households
Spending on
goods and services
Injections
Households
Firms
Factor incomes

13. Injections into the Circular Flow
Injections - are revenue for firms not from sales to household
e.g. investment by firms, government purchases and exports

14. The Circular Flow of Income with Government and Foreign Trade
Goods & Services (G)
Transfer Payments (B)
Taxes (T)
Foreign Sector::
Export (X)
Import (M)
Government
spends money on goods & services (G)
finances welfare payments, i.e. transfer payments (B) this spending is financed by taxes (T)
Foreign Sector:
Export (X)
made at local economy but sold abroad. Taiwan beer selling in China is export of goods lol
Import (M)
made abroad and bought at local economy. Scottish whisky is an example of Import goods

15. The Circular Flow of Income in Symbols
Domestic Output (GDP) is either:
Consumed (C)
Invested (I)
Bought by the Government (G)
Bought by the foreigners, net exports (X-M)
Factor Incomes are spent on:
Consumption (C)
Saving (S)
Paying taxes net of benefits (T-B)
Domestic Output (GDP) is either
Consumed (C)
Invested (I) (INCREASE IN STOCK OF CAPITAL)
Bought by the Government (G)
Bought by the foreigners, net exports (X-M)
Factor Incomes are spent on
Consumption (C)
Saving (S)
Paying taxes net of benefits (T-B)

16. The Circular Flow of Income in Symbols
GDP = C + I + G + (X – M)
Factor Income = C + S + (T – B)
Domestic Output (GDP) = Factor Incomes
Since every things produced in the economy
generates equivalent factor income

17. The Circular Flow of Income in Symbols
Domestic Output
Factor Incomes
C + I + G + (X – M) =
C + S + (T – B)
C: Consumption
I: Investment
G: Government
Expenditure
X-M: Net exports
C: Consumed
S: Savings
T-B: Taxes
Net of Benefits

18. The Circular Flow of Income in Symbols
Domestic Output
Factor Incomes
C + I + G + (X – M) =
C + S + (T – B)
I + G + X
S + (T – B) + M =
Total Injections
Total Leakages

19. Figure: Showing how a Circular Flow of Income function (sources from Wikipedia)

20. Useful Resources:
come

21. THE END (:
Rebecca & Dawgen