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The Circular Flow of Income
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The circular flow of income
Firms Factor payments Consumption of domestically produced goods and services (Cd) Households
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THE CIRCULAR FLOW OF INCOME
Withdrawals net saving net taxes import expenditure Injections investment government expenditure export expenditure
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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
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THE CIRCULAR FLOW OF INCOME
The relationship between injections and withdrawals the links between them planned injections may not equal planned withdrawals Equilibrium in the circular flow The circular flow and the four macroeconomic objectives
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Measuring National Income
The National Economy Measuring National Income
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MEASURING NATIONAL INCOME
The three ways of measuring GDP the production method the income method the expenditure method
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The circular flow of national income and expenditure
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The circular flow of national income and expenditure
(1) Production (2) Incomes (3) Expenditure
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MEASURING NATIONAL INCOME
The product method the problem of double counting the measuring of value added gross value added (GVA) some qualifications stocks government services ownership of dwellings taxes and subsidies on products
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UK GVA (product-based measure): 2001
Agriculture, forestry and fishing £8 241 m Mining, energy and water supply £ m Manufacturing £ m Construction £ m Wholesale and retail trade; repairs £ m Hotels and restaurants £29 359m Transport and communication £ m Banking, finance, insurance, etc. £6 667 m Letting of property £ m Public administration and defence £ m Education, health and social work £ m Other services £ m Total GVA £ m 0.9 4.7 17.5 5.4 12.2 3.4 8.0 0.8 24.0 4.8 13.0 5.2 100.0
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UK GVA (product-based measure): 2001
Agriculture, forestry and fishing £8 241 m Mining, energy and water supply £ m Manufacturing £ m Construction £ m Wholesale and retail trade; repairs £ m Hotels and restaurants £29 359m Transport and communication £ m Banking, finance, insurance, etc. £6 667 m Letting of property £ m Public administration and defence £ m Education, health and social work £ m Other services £ m Total GVA £ m 0.9 4.7 17.5 5.4 12.2 3.4 8.0 0.8 24.0 4.8 13.0 5.2 100.0
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UK GVA (product-based measure): 2001
Agriculture, forestry and fishing £8 241 m Mining, energy and water supply £ m Manufacturing £ m Construction £ m Wholesale and retail trade; repairs £ m Hotels and restaurants £29 359m Transport and communication £ m Banking, finance, insurance, etc. £6 667 m Letting of property £ m Public administration and defence £ m Education, health and social work £ m Other services £ m Total GVA £ m 0.9 4.7 17.5 5.4 12.2 3.4 8.0 0.8 24.0 4.8 13.0 5.2 100.0 Percentage of GVA
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UK GVA by category of income: 2001
Compensation of employees (wages and salaries) £ m Operating surplus (gross profit, rent and interest of firms government and other institutions) £ m Mixed incomes £ m Tax less subsidies on production (other than those on products) plus statistical discrepancy £19 158m Total GVA £ m 63.6 27.3 6.9 2.2 100.0
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UK GVA by category of income: 2001
Compensation of employees (wages and salaries) £ m Operating surplus (gross profit, rent and interest of firms government and other institutions) £ m Mixed incomes £ m Tax less subsidies on production (other than those on products) plus statistical discrepancy £19 158m Total GVA £ m 63.6 27.3 6.9 2.2 100.0
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UK GVA by category of income: 2001
Compensation of employees (wages and salaries) £ m Operating surplus (gross profit, rent and interest of firms government and other institutions) £ m Mixed incomes £ m Tax less subsidies on production (other than those on products) plus statistical discrepancy £19 158m Total GVA £ m 63.6 27.3 6.9 2.2 100.0 Percentage of GVA
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UK GDP (product-based measure): 2001
GVA (gross value added at basic prices) £ m plus Taxes on products £ m less Subsidies on products £6 712m GDP (at market prices) £ m
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UK GDP (product-based measure): 2001
GVA (gross value added at basic prices) £ m plus Taxes on products £ m less Subsidies on products £6 712m GDP (at market prices) £ m
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UK GDP (product-based measure): 2001
GVA (gross value added at basic prices) £ m plus Taxes on products £ m less Subsidies on products £6 712m GDP (at market prices) £ m
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UK GDP (product-based measure): 2001
GVA (gross value added at basic prices) £ m plus Taxes on products £ m less Subsidies on products £6 712m GDP (at market prices) £ m
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UK GDP by category of expenditure, GNI and NNI: 2001
£million Consumption expenditure of households and NPISH (C) Government final consumption (G) Gross capital formation (I) Exports of goods and services (X) less Imports of goods and services (M) Statistical discrepancy 499 Gross domestic product (GDP) (at market prices)
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UK GDP by category of expenditure, GNI and NNI: 2001
£million Consumption expenditure of households and NPISH (C) Government final consumption (G) Gross capital formation (I) Exports of goods and services (X) less Imports of goods and services (M) Statistical discrepancy 499 Gross domestic product (GDP) (at market prices) plus Net income from abroad 5 756 Gross national income (GNI)
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UK GDP by category of expenditure, GNI and NNI: 2001
£million Consumption expenditure of households and NPISH (C) Government final consumption (G) Gross capital formation (I) Exports of goods and services (X) less Imports of goods and services (M) Statistical discrepancy 499 Gross domestic product (GDP) (at market prices) plus Net income from abroad 5 756 Gross national income (GNI) less Capital consumption (depreciation) Net national income (NNI)
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Macroeconomic equilibrium
In a very simple economy, it must be that: Y = C + I Y = C + S C + S = C + I i.e. S = I Actual savings are by definition equal to actual investment by it is by no means guaranteed that planned savings match planned investments The saving and investment decisions are taken by various groups, and if there is a mismatch, instability may be generated
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All income is consumed GNI = GNP = 100
Consumption = 100 Households Firms GNI = 100 What happens if households want to save part of their income (S = 10) ?
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Planned savings equal planned investments
Consumption = 90 Households Firms S=10 I=10 Capital- market GNI = 100 Savings are a leakage (withdrawal) from the circular flow
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Households want to save more
Consumption = 80 Households Firms S=20 I=10 Capital- market GNI = 100 There is an unplanned increase in inventories since households save more
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Households want to save more
Consumption = 40 Households Firms S=10 I=10 Capital- market GNI = 50 The equilibrium level of income is reduced as firms cut back on production.
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