1. The Circular Flow of Income

2. What sectors make up an economy?
Households
Firms
Government
International

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

4. 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)

5. 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

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

7. 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’….

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

9. 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

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

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

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

13. 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

14. Measuring economic growth
National Income
Measuring economic growth

15. 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.

16. What’s the difference
GDP v GNP

17. 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.

18. Key Terms needed…..
Real & Nominal

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

20. Real takes into account of inflation

21. 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

22. 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.