Circular flow of income Managerial Economics

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Circular flow of income Managerial Economics

  1. 1. Circular Flow of Income • • • • • • • • Y C S I T G M X = = = = = = = = Income Consumption Expenditure Savings Investment Taxation Government Expenditure Imports Exports 1
  2. 2. Circular Flow - Simple Income Resources Consumers Producers Goods and Services Consumption Expenditure 2
  3. 3. 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 3
  4. 4. Circular Flow Savings and Investment Y Consumers Producers C S Financial system I 4
  5. 5. Circular Flow Savings and Investment • S = expand. I : Economy will not • S > I : Economy contract. • S < I : Economy expand. 5
  6. 6. Circular Flow - Government Sector Y Producers Consumers TAXATION GOVERNMENT SPENDING SUBSIDIES C S Financial system I 6
  7. 7. Circular Flow - Government Sector •T = G : Economy will not expand or contract •T > G : Economy will contract •T < G : Economy will expand 7
  8. 8. Circular Flow - Four Sectors Y C Producers S Financial system I T GOVERNMENT G M OVERSEAS SECTOR X INJECTIONS LEAKAGES Consumers 8
  9. 9. Circular Flow - Four Sectors •Equilibrium is achieved when Total Leakage = Total Injections: •S + T + M = I + G + X 9
  10. 10. Circular Flow - Four Sectors •Equilibrium is achieved when Total Leakage = Total Injections: •S + T + M = I + G + X 9

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