Circular Flow of Income

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Circular Flow of Income

Y C S I T G M X = = = = = = = = Income Consumption Expenditure Savings Investment Taxation Government Expenditure Imports Exports
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Circular Flow - Simple

Income

Resources

Consumers
Goods and Services

Producers

Consumption Expenditure

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

Circular Flow of Income

Note:
Total Output = Total Income = Total Expenditure

O =

Circular Flow Savings and Investment

Y

Consumers C

Producers

Capital Market

Circular Flow Savings and Investment

Y = O = Y = C+S = Therefore S = C+S C+I O C+I
I
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Circular Flow - Government Sector

Y

Consumers
TAXATION

TAXATION

Producers

GOVERNMENT

SPENDING SUBSIDIES

C S
CAPITAL MARKET

I
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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
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Circular Flow - Four Sectors

Y

Consumers C
LEAKAGES

Producers
CAPITAL MARKET

T M

GOVERNMENT

OVERSEAS SECTOR

X
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INJECTIONS

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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