30. The circular flow of income
INJECTIONS
Export
expenditure (X)
Investment (I)
Factor
Payments
Consumption
of domestically
produced
goods &
services (Cd)
Government
expenditure (G)
BANKS, etc
Net
saving (S)
GOV.
ABROAD
Import
Net
expenditure (M)
taxes (T)
Leakages
31. Leakages in the Circular Flow
Flow Variables which have negative impact on the
process of production in the economy.
Savings [S]
Imports [M]
Taxes [T]
32. Injections in the Circular Flow
Flow Variables which cause expansion in the
process of production in the economy.
Investment [I]
Govt. Consumption
Expenditure [G]
Exports [X]
33. 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)
34. 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
£
35. Significance of the Study of Circular
Flow of Income
Knowledge of Interdependence
Identification of Injections & Leakages
Estimation of National Income
Level and Structure of Economic Activity
36. Difference between Real Flow and
Money Flow
1. Real flow is the exchange of goods and services between household
and firms whereas money flow is the monetary exchange between
two sectors.
2. In real flow household sector supplies raw material, land, labour,
capital and enterprise to firms and in return firms sector provides
finished goods and services to household sector. Whereas in money
flow, firm sector gives remuneration in the form of money to
household sector a wages and salaries, rent, interest etc.
3. Difficulties of barter system for the exchange of goods and factor
services between households and firms sector in real flow, whereas
no such difficulty or inconvenience arise in money flow.
4. When goods and services flow from one sector of the economy to
another, it is known as real flow.
37. Gross national income
• The Gross national income (GNI) consists of: the
personal consumption expenditure, the gross
private investment, the government consumption
expenditures, the net income from assets abroad
(net income receipts), and the gross exports of
goods and services, after deducting two
components: the gross imports of goods and
services, and the indirect business taxes.
• The GNI is similar to the gross national product
(GNP), except that in measuring the GNP one
does not deduct the indirect business taxes.
38. GNI versus GDP
• GNP is a concept that goes hand in hand with
GNI, GDP, and NNI.
• In contrast to the GNI, the GNP does not account
for the balance of cross-country income, such as
interest and dividends. In contrast to the GDP, the
GNP account for the values of products and
services based on citizenship of the owners
rather than the territory of the activity.
39. The income approach
The income approach equates the total output of a nation to the total factor
income received by residents or citizens of the nation. The main types of
factor income are:
Employee compensation (cost of fringe benefits, including unemployment,
health, and retirement benefits);
Interest received net of interest paid;
Rental income (mainly for the use of real estate) net of expenses of
landlords;
Royalties paid for the use of intellectual property and extractable natural
resources
Formula
NDP at factor cost = Compensation of employees + Net interest + Rental &
royalty income + Profit of incorporated and unincorporated NDP at factor
cost.
40. The expenditure approach
•
The expenditure approach is basically an output accounting method. It focuses
on finding the total output of a nation by finding the total amount of money
spent.
Where:
C = household consumption expenditures / personal consumption expenditures
I = gross private domestic investment
G = government consumption and gross investment expenditures
X = gross exports of goods and services
M = gross imports of goods and services
Note: (X - M) is often written as XN, which stands for "net exports"
GDP and Gross domestic product (GDP) is defined as "the value of all final goods
and services produced in a country in 1 year".
Gross National Product (GNP) is defined as "the market value of all goods and
services produced in one year by labor and property supplied by the residents of
a country."
41. • As an example, the table below shows some GDP and GNP, and NNI data
for the United States:
• NDP: Net domestic product is defined as "gross domestic product (GDP)
minus depreciation of capital",[ similar to NNP.
• GDP per capita: Gross domestic product per capita is the mean value of
the output produced per person, which is also the mean income.
42. List of References
•
Morales, M. 2013. Circula flow of income or circula flow: http://goo.gl/Ny9Fsi
•
Purani, M .2014. National income and circular flow of income: http://goo.gl/B7sP5v
•
Sahil , N. 2014. Circular flow of income, leakages and injections: http://goo.gl/Jj80jK
•
Tutor2u. 2013. Circular flow of income: http://goo.gl/QWvHmT
•
Tutor2u. 2013. Building the circular flow of income and spending: http://goo.gl/BqDbYa
