Circular flow of income or Circular flow:

Sonnyboy Nicholas Nxumalo201248667.

The three sectors

The four sectors

The five sectors

Investment (I)Investment (I)

Governmentexpenditure (G)

Governmentexpenditure (G)

Exportexpenditure (X)

Exportexpenditure (X)

BANKS, etc

Netsaving (S)

Netsaving (S)

GOV.

Nettaxes (T)

Nettaxes (T)

ABROAD

Importexpenditure (M)

Importexpenditure (M)

The circular flow of incomeThe circular flow of income

Leakages

INJECTIONS

Consumption of domestically

produced goods &

services (Cd)

Factor Payments

Flow Variables which have negative impact on the process of production in the economy.

Leakages in the Circular Flow

Savings [S]

1

Taxes [T]

2

Imports [M]

3

Flow Variables which cause expansion in the process of production in the economy.

Injections in the Circular Flow

Investment [I]

1

Govt. Consumption Expenditure [G]

2 3

Exports [X]

Injections and leakages

Imports (M)

Taxation (T)

Savings (S)

Exports (X)

Government Consumption

Investment (I)

Balance of Trade

Government Budget Balance

Balance between

savings and investment

Households Government Firms

Purchases of goods and services

£ Demand

Wages, dividends, interest, profits and rent

£Incomes

Taxes

Social Transfers

Govt Purchases

Taxes

Injections and Leakages from

the Circular Flow

InjectionsGovernment

SpendingInvestment

Exports

LeakagesSavingsTaxationImports

Equilibrium when

injections = leakages

Rest of the World

Imports Exports

Production by firms generates factor incomes

Capital Investment

££

£

Knowledge of Interdependence

Identification of Injections & Leakages

Estimation of National Income

Level and Structure of Economic Activity

Significance of the Study of Circular Flow of Income

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.

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.

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.

The income approachThe 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

FormulaNDP at factor cost = Compensation of employees + Net interest + Rental & royalty income + Profit of incorporated and unincorporated NDP at factor cost.

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 expendituresI = gross private domestic investmentG = government consumption and gross investment expendituresX = gross exports of goods and servicesM = 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."

• 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.

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

Thank You!