2.4
NATIONAL INCOME
CIRCULAR FLOW OF INCOME
CIRCULAR FLOW OF INCOME - a model that describes how money moves within
an economy. Shows the flow of goods, services and money between different
sectors
KEY COMPONENTS
households - provides factors of production (land, labour, capital) to firms,
and recieves wages and profits in return
firms - produce goods and services, paying households for their factors of
production and receives revenue from selling products
government - collects taxes from households and firms to spend on public
services and welfare
financial sector - facilitates saving and investments by households and firms
foreign sector - engages in trade with domestic economy through exports and
imports
FLOWS
real flow - movement of goods and services (labour and products)
money flow - movement of money (wages, consumer spending)
LEAKAGES AND INJECTIONS
leakages - removes money from circular flow
savings, taxes, imports
injections - adds money to circular flow
investment, gov spending, exports
2.4 1
, e.g -
households supply labour to apple to recieve wages in return
apple uses this to produce iphones
sold to consumers, generates revenue
DISTINCTION BETWEEN INCOME AND WEALTH
INCOME
The flow of money received, measured over a period of time
sources - wage, rent, interest, profits
WEALTH
Refers to the stock of assets owned at a given point in time
physical assets - houses, cars
financial assets - stocks, bonds
INJECTIONS AND WITHDRAWALS
INJECTIONS
INJECTIONS - additions to the economy’s circular flow of income, increasing total
spending and economic activity
TYPES OF INJECTIONS
INVESTMENT - expenditure on capital goods by businesses - e,g machinery
e.g firm investing in new sector - economic activity increased through
construction and future production capacity
GOV SPENDING - public sector spending on goods and services - e.g
infrastructure, healthcare
e.g - gov investing into building new roads - creates many jobs
2.4 2
NATIONAL INCOME
CIRCULAR FLOW OF INCOME
CIRCULAR FLOW OF INCOME - a model that describes how money moves within
an economy. Shows the flow of goods, services and money between different
sectors
KEY COMPONENTS
households - provides factors of production (land, labour, capital) to firms,
and recieves wages and profits in return
firms - produce goods and services, paying households for their factors of
production and receives revenue from selling products
government - collects taxes from households and firms to spend on public
services and welfare
financial sector - facilitates saving and investments by households and firms
foreign sector - engages in trade with domestic economy through exports and
imports
FLOWS
real flow - movement of goods and services (labour and products)
money flow - movement of money (wages, consumer spending)
LEAKAGES AND INJECTIONS
leakages - removes money from circular flow
savings, taxes, imports
injections - adds money to circular flow
investment, gov spending, exports
2.4 1
, e.g -
households supply labour to apple to recieve wages in return
apple uses this to produce iphones
sold to consumers, generates revenue
DISTINCTION BETWEEN INCOME AND WEALTH
INCOME
The flow of money received, measured over a period of time
sources - wage, rent, interest, profits
WEALTH
Refers to the stock of assets owned at a given point in time
physical assets - houses, cars
financial assets - stocks, bonds
INJECTIONS AND WITHDRAWALS
INJECTIONS
INJECTIONS - additions to the economy’s circular flow of income, increasing total
spending and economic activity
TYPES OF INJECTIONS
INVESTMENT - expenditure on capital goods by businesses - e,g machinery
e.g firm investing in new sector - economic activity increased through
construction and future production capacity
GOV SPENDING - public sector spending on goods and services - e.g
infrastructure, healthcare
e.g - gov investing into building new roads - creates many jobs
2.4 2
