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Circular flow of income and expenditure

Circular flow of income and expenditure



Circular flow of income and expenditure

Circular flow of income and expenditure



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    Circular flow of income and expenditure Circular flow of income and expenditure Presentation Transcript

    • Macroeconomics2012Prof Michael T. NoelCollege of Business Administration Education
    • Topics: Definition of Macroeconomic Macroeconomic problem Circular flow of income and expenditure
    • What is macroeconomics?Macroeconomics: analysis of the economy as a whole.Factors affecting macroeconomics output (GDP or GNP) a. consumption expenditure b. Investment expenditure c. Government expenditure d. Balance of payment
    • The Economic Problem: How do we use scarce resources to best satisfy unlimited human wants?
    • Illustration of macroeconomicproblems Input: a. Consumption expenditure b. Investment Output: expenditure GDP/GNP c. Government expenditure d. Balance of payment
    • GROSS DOMESTICPRODUCT The market value of all goods and services produced within a country in a given period of time. It can be measured as all the EXPENDITURES to buy the goods and services produced. It can also be measured as all the INCOME earned from producing the goods and services. Since every peso spent is someone’s income, the two measures give the same result.
    • Flow of income and expenditureis present in every economicactivitiesA. ConsumptionB. ProductionC. TaxationD. Transfer of paymentE. ImportationF. Exportation
    • Gross Domestic ProductThe circular flow diagram shows the transactions amonghouseholds, firms, governments, and the rest of the world.
    • Gross Domestic ProductFirms hire factors of production from households. The blueflow, Y, shows total income paid by firms to households.
    • Gross Domestic Product◦Households buy consumer goods and services. The redflow, C, shows consumption expenditures.
    • Gross Domestic ProductHouseholds save, S, and pay taxes, T. Firms borrow some ofwhat households save to finance their investment.
    • Gross Domestic Product◦Firms buy capital goods from other firms. The red flow Irepresents this investment expenditure by firms.
    • Gross Domestic Product◦Governments buy goods and services, G, and borrow orrepay debt if spending exceeds or is less than taxes
    • Gross Domestic ProductThe rest of the world buys goods and services from us, X andsells us goods and services, M—net exports are X - M
    • Gross Domestic ProductAnd the rest of the world borrows from us or lends to usdepending on whether net exports are positive or negative.
    • Gross Domestic Product◦The blue and red flows are the circular flow of income andexpenditure. The green flows are borrowing, lending, and taxes.
    • Gross Domestic ProductThe sum of the red flows equals the blue flow.
    • Gross Domestic Product◦That is: Y = C + I + G + X - M
    • Expenditures Expenditures are purchases of goods and services. Expenditures are ◦ Consumption (C) ◦ Investment (I) ◦ Government spending (on goods and services) (G) ◦ Net Exports (X-M)  Exports (X)  Imports (M)
    • Expenditures equal Income Expenditures= C+I+G+X–M All expenditures become someone’s income soY (income) = C + I + G + X – M
    • Government Government spending: ◦ Goods and services (G)  Roads, health care, education, helicopters, police officers salaries, judges salaries. Government revenue: ◦ Taxes ◦ (Income from Crown corporations) ◦ (Tariffs) ◦ Less Transfers to persons (part of net taxes)  GST rebates, unemployment insurance, pensions, subsidies  Interest on the debt (substantial)  NOTE: The gov’t is not buying services, so transfers are not an expenditure.
    • Budgetary Deficits andSurpluses Spending  Surplus ◦ Goods and services  G + Tr < Tx (G) + Transfers to  G < Tx – Tr persons (Tr)  G < NT Revenue  Deficit ◦ Taxes (Tx)  G + Tr > Tx Net Taxes  G > Tx – Tr ◦ Tx – Tr = NT  G > NT
    • Savings and Investment Investment is financed by savings Savings have three sources: ◦ Savings by households  The part of income households do not spend on consumption or net taxes.  (S = Y - C - NT) ◦ Savings by governments  NT – G = savings ◦ Savings of foreigners  M – X = foreign borrowing
    • STOCKS AND FLOWS FLOWS  STOCKS ◦ Income : the goods and ◦ Wealth: All the goods a services produced each person owns. Wealth is year the sum of past net ◦ Deficits: The excess of saving. spending over income ◦ Debt: the sum of all past each year deficits less all past ◦ Investment: Goods surpluses produced to be used in ◦ Capital: All the production each year investment goods ◦ Surpluses: The excess owned. Capital is the of revenue over sum of past net expenditures each year. investment
    • Study well