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Introductory AS Macro revision resource on the circular flow of income and spending
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Building the Circular Flow of Income and Spending
Households Government Firms
Households Government Firms
Households Government Firms
Purchases of goods and services
£Demand
Households Government Firms
Purchases of goods and services
£Demand
Supply
Households Government Firms
Purchases of goods and services
£Demand
Wages, dividends, interest, profits and rent
£
Supply
Households Government Firms
Purchases of goods and services
£Demand
Wages, dividends, interest, profits and rent
£Incomes
Supply
Households Government Firms
Purchases of goods and services
£Demand
Wages, dividends, interest, profits and rent
£Incomes
Supply
Households Government Firms
Purchases of goods and services
£Demand
Wages, dividends, interest, profits and rent
£Incomes
Taxes
Supply
Households Government Firms
Purchases of goods and services
£Demand
Wages, dividends, interest, profits and rent
£Incomes
Taxes
Supply
Households Government Firms
Purchases of goods and services
£Demand
Wages, dividends, interest, profits and rent
£Incomes
Taxes
Social Transfers
Supply
Households Government Firms
Purchases of goods and services
£Demand
Wages, dividends, interest, profits and rent
£Incomes
Taxes
Social Transfers
Supply
Households Government Firms
Purchases of goods and services
£Demand
Wages, dividends, interest, profits and rent
£Incomes
Taxes
Social Transfers
Govt Purchases
Supply
Households Government Firms
Purchases of goods and services
£Demand
Wages, dividends, interest, profits and rent
£Incomes
Taxes
Social Transfers
Govt Purchases
Supply
Households Government Firms
Purchases of goods and services
£Demand
Wages, dividends, interest, profits and rent
£Incomes
Taxes
Social Transfers
Govt Purchases
Taxes
Supply
Households Government Firms
Purchases of goods and services
£Demand
Wages, dividends, interest, profits and rent
£Incomes
Taxes
Social Transfers
Govt Purchases
Taxes
The Domestic Circular Flow
HouseholdsGovernment
Firms
?
Supply
Production by firms generates factor incomes
Households Government Firms
Purchases of goods and services
£Demand
Wages, dividends, interest, profits and rent
£Incomes
Taxes
Social Transfers
Govt Purchases
Taxes
The Domestic Circular Flow
HouseholdsGovernment
Firms
Rest of the World
Production by firms generates factor incomes
Supply
Households Government Firms
Purchases of goods and services
£Demand
Wages, dividends, interest, profits and rent
£Incomes
Taxes
Social Transfers
Govt Purchases
Taxes
The Domestic Circular Flow
HouseholdsGovernment
Firms
Rest of the World
Production by firms generates factor incomes
Supply
Households Government Firms
Purchases of goods and services
£Demand
Wages, dividends, interest, profits and rent
£Incomes
Taxes
Social Transfers
Govt Purchases
Taxes
The Domestic Circular Flow
HouseholdsGovernment
Firms
Rest of the World
Imports
Production by firms generates factor incomes
Supply
Households Government Firms
Purchases of goods and services
£Demand
Wages, dividends, interest, profits and rent
£Incomes
Taxes
Social Transfers
Govt Purchases
Taxes
The Domestic Circular Flow
HouseholdsGovernment
Firms
Rest of the World
Imports
Production by firms generates factor incomes
Supply
Households Government Firms
Purchases of goods and services
£Demand
Wages, dividends, interest, profits and rent
£Incomes
Taxes
Social Transfers
Govt Purchases
Taxes
The Domestic Circular Flow
HouseholdsGovernment
Firms
Rest of the World
Imports Exports
Production by firms generates factor incomes
Supply
Households Government Firms
Purchases of goods and services
£Demand
Wages, dividends, interest, profits and rent
£Incomes
Taxes
Social Transfers
Govt Purchases
Taxes
Injections and Leakages from
the Circular Flow
Rest of the World
Imports ExportsTrade balance
Production by firms generates factor incomes
Supply
Households Government Firms
Purchases of goods and services
£ Demand
Wages, dividends, interest, profits and rent
£Incomes
Taxes
Social Transfers
Govt Purchases
Taxes
Injections and Leakages from
the Circular Flow
Rest of the World
Imports ExportsTrade balance
Production by firms generates factor incomes
Supply
Households Government Firms
Purchases of goods and services
£ Demand
Wages, dividends, interest, profits and rent
£Incomes
Taxes
Social Transfers
Govt Purchases
Taxes
Injections and Leakages from
the Circular Flow
InjectionsGovernment
SpendingInvestment
Exports
LeakagesSavingsTaxationImports
Equilibrium when
injections = leakages
Rest of the World
Imports Exports
Production by firms generates factor incomes
Capital Investment
££
£
Consumer Spending (C) Saving (S) Investment (I)
Define your terms accurately!
Consumer Spending (C) Saving (S) Investment (I)
Define your terms accurately!
Household spending on goods and services
Consumer Spending (C) Saving (S) Investment (I)
Define your terms accurately!
Household spending on goods and services
Deferred spending, disposable income that is not spent
Consumer Spending (C) Saving (S) Investment (I)
Define your terms accurately!
Household spending on goods and services
Deferred spending, disposable income that is not spent
Spending on capital goods including plant & machinery and infrastructure
Aggregate Demand (AD)
• Total demand for domestically-produced goods and services = GDP
• AD = the sum ofConsumer spending (C)+ Investment spending (I)+ Government spending (G)+ Exports of goods and services (X)- Imports of goods and services (M)
2:18:10 PM
Exports (X) Government Consumption Investment (I)
Injections into the Circular Flow
Goods and services sold to consumers (buyers) in overseas markets
State (public) sector demand for goods and services e.g. health and education
Spending on capital goods including plant & machinery and infrastructure
Imports (M) Taxation (T) Savings (S)
Leakages from the Circular Flow
Goods and services bought by domestic consumers and businesses from overseas
Compulsory payments to the government – direct and indirect taxes
Deferred spending, disposable income that is not spent
Injections and leakages
Imports (M)
Taxation (T)
Savings (S)
Exports (X)
Government Consumption
Investment (I)
Injections and leakages
Imports (M)
Taxation (T)
Savings (S)
Exports (X)
Government Consumption
Investment (I)
Balance of Trade
Injections and leakages
Imports (M)
Taxation (T)
Savings (S)
Exports (X)
Government Consumption
Investment (I)
Balance of Trade
Government Budget Balance
Injections and leakages
Imports (M)
Taxation (T)
Savings (S)
Exports (X)
Government Consumption
Investment (I)
Balance of Trade
Government Budget Balance
Balance between
savings and investment
Injections and leakages
Imports (M)
Taxation (T)
Savings (S)
Exports (X)
Government Consumption
Investment (I)
Balance of Trade
Government Budget Balance
Balance between
savings and investment
Injections and leakages
Exports (X)
Government Consumption
Investment (I)
Imports (M)
Taxation (T)
Savings (S)
When Injections > Leakages
Then the level of
Will tend to
Injections and leakages
Exports (X)
Government Consumption
Investment (I)
Imports (M)
Taxation (T)
Savings (S)
When Injections > Leakages
Then the level of
Will tend to
Injections and leakages
Exports (X)
Government Consumption
Investment (I)
Imports (M)
Taxation (T)
Savings (S)
When Leakages > Injections
Then the level of
Will tend to
Injections and leakages
Exports (X)
Government Consumption
Investment (I)
Imports (M)
Taxation (T)
Savings (S)
When Leakages > Injections
Then the level of
Will tend to
Circular Flow Questions Economic event Which injection or
leakage is/are likely to be most affected?
X, I, G, S, M T
On balance - what is the likely effect on the level
of GDP– expansion or contraction (circle your
answer)
1. A survey finds a fall in confidence for UK manufacturing firms
X G I S M T () Expansion / Contraction ()
2. A survey finds that construction companies expect average house prices to rise by 5% in 2013
X G I S M T () Expansion / Contraction ()
3. The pound rises in value by 10% against the US dollar ($)
X G I S M T () Expansion / Contraction ()
4. The government decides to cut wages of civil servants
X G I S M T () Expansion / Contraction ()
Circular Flow Questions Economic event Which injection or
leakage is/are likely to be most affected?
X, I, G, S, M T
On balance - what is the likely effect on the level
of GDP– expansion or contraction (circle your
answer)
5 China reduces in the size of an import tariff on British-made steel
X G I S M T () Expansion / Contraction ()
6 A new forecast from the IMF suggests that unemployment in the UK will fall by 250,000 over the next two years
X G I S M T () Expansion / Contraction ()
7 The government increases the rate of VAT from 20% to 22%
X G I S M T () Expansion / Contraction ()
Circular Flow Questions Economic event Which injection or
leakage is/are likely to be most affected?
X, I, G, S, M T
On balance - what is the likely effect on the level
of GDP– expansion or contraction (circle your
answer)
8 The government decides to increase the UK road-building programme by £500m for 2013 and 2014
X G I S M T () Expansion / Contraction ()
9 The prices of many consumer goods and services start to fall, and people start to expect further price reductions in the future
X G I S M T () Expansion / Contraction ()
10 The Bank of England’s Monetary Policy Committee decides to raise official interest rates from 0.5% to 2% over a period of months
X G I S M T () Expansion / Contraction ()
11 The government decides to increase the UK road-building programme by £500m for 2013 and 2014
X G I S M T () Expansion / Contraction ()
Circular Flow Questions Economic event Which injection or
leakage is/are likely to be most affected?
X, I, G, S, M T
On balance - what is the likely effect on the level
of GDP– expansion or contraction (circle your
answer)
12 The government increases revenues from taxes on high-income earners by £2bn and uses the money to increase spending on welfare payments to low-income families at £2bn
X G I S M T () Expansion / Contraction ()
13 Improvements in labour productivity causes lower costs and increased profits for car producers located in the UK
X G I S M T () Expansion / Contraction ()
14 The Chancellor announces a reduction in the rate of national insurance contributions paid by small businesses
X G I S M T () Expansion / Contraction ()
15 The government increases revenues from taxes on high-income earners by £2bn and uses the money to increase spending on welfare payments to low-income families at £2bn
X G I S M T () Expansion / Contraction ()
UK Economic CycleQuarterly value of real GDP, £ billion measured at constant prices
Tracking the UK Economic Cycle - UK Real National Output
Source: UK Statistics Commission
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
bill
ion
s
290
300
310
320
330
340
350
360
370
380
390
400
£ (b
illio
ns)
290
300
310
320
330
340
350
360
370
380
390
400
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