Circular flow of income spending

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Introductory AS Macro revision resource on the circular flow of income and spending

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Circular flow of income spending

  1. 1. Building the Circular Flow of Income and Spending
  2. 2. Households Government Firms
  3. 3. Households Government Firms
  4. 4. Purchases of goods and services £ Households Demand Government Firms
  5. 5. Purchases of goods and services £ Households Demand Government Firms Supply
  6. 6. Purchases of goods and services £ Households Demand Government Firms Supply £ Wages, dividends, interest, profits and rent
  7. 7. Purchases of goods and services £ Households Demand Government Firms Supply Incomes £ Wages, dividends, interest, profits and rent
  8. 8. Purchases of goods and services £ Households Demand Government Firms Supply Incomes £ Wages, dividends, interest, profits and rent
  9. 9. Purchases of goods and services £ Households Taxes Demand Government Firms Supply Incomes £ Wages, dividends, interest, profits and rent
  10. 10. Purchases of goods and services £ Households Taxes Demand Government Firms Supply Incomes £ Wages, dividends, interest, profits and rent
  11. 11. Purchases of goods and services £ Taxes Households Demand Government Firms Supply Incomes Social Transfers Wages, dividends, interest, profits and rent £
  12. 12. Purchases of goods and services £ Taxes Households Demand Government Firms Supply Incomes Social Transfers Wages, dividends, interest, profits and rent £
  13. 13. Purchases of goods and services £ Taxes Households Govt Purchases Government Demand Firms Supply Incomes Social Transfers Wages, dividends, interest, profits and rent £
  14. 14. Purchases of goods and services £ Taxes Households Govt Purchases Government Demand Firms Supply Incomes Social Transfers Wages, dividends, interest, profits and rent £
  15. 15. Purchases of goods and services £ Taxes Households Govt Purchases Government Demand Firms Supply Incomes Social Transfers Taxes Wages, dividends, interest, profits and rent £
  16. 16. ? Purchases of goods and services The Domestic Circular Flow Households Government Firms £ Taxes Households Govt Purchases Government Demand Firms Supply Incomes Social Transfers Taxes Wages, dividends, interest, profits and rent Production by firms generates factor incomes £
  17. 17. Rest of the World Purchases of goods and services The Domestic Circular Flow Households Government Firms £ Taxes Households Govt Purchases Government Demand Firms Supply Incomes Social Transfers Taxes Wages, dividends, interest, profits and rent Production by firms generates factor incomes £
  18. 18. Rest of the World Purchases of goods and services The Domestic Circular Flow Households Government Firms £ Taxes Households Govt Purchases Government Demand Firms Supply Incomes Social Transfers Taxes Wages, dividends, interest, profits and rent Production by firms generates factor incomes £
  19. 19. Imports Rest of the World Purchases of goods and services The Domestic Circular Flow Households Government Firms £ Taxes Households Govt Purchases Government Demand Firms Supply Incomes Social Transfers Taxes Wages, dividends, interest, profits and rent Production by firms generates factor incomes £
  20. 20. Imports Rest of the World Purchases of goods and services The Domestic Circular Flow Households Government Firms £ Taxes Households Govt Purchases Government Demand Firms Supply Incomes Social Transfers Taxes Wages, dividends, interest, profits and rent Production by firms generates factor incomes £
  21. 21. Imports Exports Rest of the World Purchases of goods and services The Domestic Circular Flow Households Government Firms £ Taxes Households Govt Purchases Government Demand Firms Supply Incomes Social Transfers Taxes Wages, dividends, interest, profits and rent Production by firms generates factor incomes £
  22. 22. Trade balance Imports Injections and Leakages from the Circular Flow Exports Rest of the World Purchases of goods and services £ Taxes Households Govt Purchases Government Demand Firms Supply Incomes Social Transfers Taxes Wages, dividends, interest, profits and rent Production by firms generates factor incomes £
  23. 23. Trade balance Imports Injections and Leakages from the Circular Flow Exports Rest of the World Purchases of goods and services £ Taxes Households Govt Purchases Government Demand Firms Supply Incomes Social Transfers Taxes Wages, dividends, interest, profits and rent Production by firms generates factor incomes £
  24. 24. Injections and Leakages from the Circular Flow Injections Government Spending Investment Exports Leakages Savings Taxation Imports Imports £ £ Purchases of goods and services £ Taxes Households Incomes Equilibrium when injections = leakages Exports Rest of the World Govt Purchases Government Social Transfers Demand Firms Taxes £ Capital Investment Wages, dividends, interest, profits and rent Production by firms generates factor incomes £
  25. 25. Define your terms accurately! Consumer Spending (C) Saving (S) Investment (I)
  26. 26. Define your terms accurately! Consumer Spending (C) Household spending on goods and services Saving (S) Investment (I)
  27. 27. Define your terms accurately! Consumer Spending (C) Household spending on goods and services Saving (S) Deferred spending, disposable income that is not spent Investment (I)
  28. 28. Define your terms accurately! Consumer Spending (C) Household spending on goods and services Saving (S) Investment (I) Deferred spending, disposable income that is not spent Spending on capital goods including plant & machinery and infrastructure
  29. 29. Aggregate Demand (AD) • Total demand for domestically-produced goods and services = GDP • AD = the sum of Consumer spending (C) + Investment spending (I) + Government spending (G) + Exports of goods and services (X) - Imports of goods and services (M) 2:18:10 PM
  30. 30. Injections into the Circular Flow Exports (X) Goods and services sold to consumers (buyers) in overseas markets Government Consumption Investment (I) State (public) sector demand for goods and services e.g. health and education Spending on capital goods including plant & machinery and infrastructure
  31. 31. Leakages from the Circular Flow Imports (M) Goods and services bought by domestic consumers and businesses from overseas Taxation (T) Savings (S) Compulsory payments to the government – direct and indirect taxes Deferred spending, disposable income that is not spent
  32. 32. Injections and leakages Exports (X) Imports (M) Government Consumption Taxation (T) Investment (I) Savings (S)
  33. 33. Injections and leakages Balance of Trade Exports (X) Imports (M) Government Consumption Taxation (T) Investment (I) Savings (S)
  34. 34. Injections and leakages Balance of Trade Exports (X) Imports (M) Government Budget Balance Government Consumption Taxation (T) Investment (I) Savings (S)
  35. 35. Injections and leakages Balance of Trade Exports (X) Imports (M) Government Budget Balance Government Consumption Taxation (T) Balance between savings and investment Investment (I) Savings (S)
  36. 36. Injections and leakages Balance of Trade Exports (X) Imports (M) Government Budget Balance Government Consumption Taxation (T) Balance between savings and investment Investment (I) Savings (S)
  37. 37. Injections and leakages When Injections > Leakages Exports (X) Imports (M) Government Consumption Taxation (T) Investment (I) Then the level of Will tend to Savings (S)
  38. 38. Injections and leakages When Injections > Leakages Exports (X) Imports (M) Government Consumption Taxation (T) Investment (I) Then the level of Will tend to Savings (S)
  39. 39. Injections and leakages When Leakages > Injections Exports (X) Imports (M) Government Consumption Taxation (T) Investment (I) Then the level of Will tend to Savings (S)
  40. 40. Injections and leakages When Leakages > Injections Exports (X) Imports (M) Government Consumption Taxation (T) Investment (I) Then the level of Will tend to Savings (S)
  41. 41. 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 ()
  42. 42. 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 ()
  43. 43. Circular Flow Questions Economic event 8 9 10 11 The government decides to increase the UK road-building programme by £500m for 2013 and 2014 The prices of many consumer goods and services start to fall, and people start to expect further price reductions in the future The Bank of England’s Monetary Policy Committee decides to raise official interest rates from 0.5% to 2% over a period of months The government decides to increase the UK road-building programme by £500m for 2013 and 2014 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) X G I S M T () Expansion / Contraction () X G I S M T () Expansion / Contraction () X G I S M T () Expansion / Contraction () X G I S M T () Expansion / Contraction ()
  44. 44. Circular Flow Questions 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) 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 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 () X G I S M T () Expansion / Contraction () The Chancellor announces a reduction in the rate of national insurance contributions paid by small businesses 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 () X G I S M T () Expansion / Contraction () Economic event 12 13 14 15
  45. 45. Tracking the UK Economic Cycle - UK Real National Output UK Economic Cycle Quarterly value of real GDP, £ billion measured at constant prices 400 400 380 370 370 360 360 350 350 340 340 330 330 320 320 310 310 300 300 290 290 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 billions 390 380 £ (billions) 390 13 Source: UK Statistics Commission
  46. 46. AS Macro Course Support Get help from fellow students, teachers and tutor2u on Twitter: #econ2 @tutor2u @tutor2u-econ
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