Flashcards
Circular Flow of Incomes
Cards in this deck (10)
- 1The Households supply labour to the firms The goods the firms produce are consumed by the households. REAL FLOW OF GOODS & SERVICESThe Payments for this Real Flow is called MONETARY FLOW
These payments are the wages the firms pay for labour which is received by the households as income. This income is spent by the households for receipt of goods and services from firms. - 2If these was only two sectors the income of the households would exactly equal their expenditure and the monetary would be a closed system.The circular flow model shows how the expenditure of one person is the income of another.
- 3As we add in the other sectors we get the possibility of injections in the model as well as leakages out of the model.Leakages out of the circular flow reduce the amount of income circulating around the flow whereas
- 4Injections into the system flow around generating further demand and incomes.Thus an injection may become an income many times over.
This is Keynes famous multiplier effect.
1/leakages
Leakages: Savings, Taxes, Imports
MPS + MPT + MPM - 5The lower the leakages the more injection will flow around the system and the higher the multiplier effect.If injections are greater than leakages the economy will expand but if leakages are greater than injections the economy will contract.
- 6An important difference between leakages and injections is their respective relationship with National Income.All leakages are endogenous variable.
They change with changes in the model. Tax revenues, savings and imports will tend to increase as national income increases. - 7Injections are independent of the income level and are exogenous. (Outside)Exports are determined by the level demand in our trading partner's economies.
- 8Investment is determined by expectations about future levels of demand and interest rates.Government spending is determined by the political process and put forward in the budget and is therefore not a function of current national income.
- 9From the diagram we can see that there are 3 methods for calculating the income of a nation and all three give us the same answer.The Income Method
The Value Added
The Expenditure method. - 10The Circular Flow of Incomes Diagram In this model we have 5 sectors made up of:Households
Firms
Government Sector
Banking Sector
The rest of the world
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- Macroeconomics (Circular flow of incomes) Flashcards on Circular Flow of Incomes, created by marinamcantwell on 11/05/2013.
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