1. Economics: Notes for Teachers
Circular Flow Of Income
Circular Flow of Income
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2. Circular Flow of Income
Y = Income
C = Consumption Expenditure
S = Savings
I = Investment
T = Taxation
G = Government Expenditure
M = Imports
X = Exports

3. Consumption Expenditure
Circular Flow - Simple
Income
Resources
Consumers
Producers
Goods and Services
Consumption Expenditure

4. Circular Flow - Simple Assumptions:
Only two sectors - Consumers and Producers
All production is sold to the consumers
Producers provide all the Goods and Services
Consumers spend all their Income on goods an services
No government and no overseas sectors
Consumers are the owners of productive resource - land, labour, capital and enterprise

5. Circular Flow of Income
Note:
Total Output = Total Income = Total Expenditure
O = Y = E

6. Circular Flow - Savings and InvestmentY
Consumers
Producers C I S
Capital Market

7. Circular Flow - Savings and Investment
Y = C + S
O = C + I
Y = O
C + S = C + I
Therefore
S = I

8. Circular Flow - Government SectorY
Producers
TAXATION
Consumers
TAXATION
GOVERNMENT
SPENDING
SUBSIDIES C S
CAPITAL MARKET I

9. Circular Flow - Government Sector
Y = C + I + T
for equilibrium
S + T = I + G if
S + T > I + G
then the level of income will fall
S + T < I + G
then the level of income will rise

10. Circular Flow - Four SectorsY
Consumers
Producers C S
CAPITAL MARKET I
LEAKAGES
INJECTIONS T
GOVERNMENT G M
OVERSEAS SECTOR X

11. Circular Flow - Four Sectors
National Income is determined by total expenditure:
C + I + G + ( X - M )
also known as Aggregate Demand
Equilibrium is achieved when Total Leakage = Total Injections:
S + T + M = I + G + X

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