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Leaders in finance, accounting
and business advice
Business Systems
Circular Flow of Income
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Circular Flow of Income• Y = Income
• C = Consumption Expenditure
• S = Savings
• I = Investment
• T = Taxation
• G = Government Expenditure
• M = Imports
• X = Exports
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Circular Flow - Simple
Consumers Producers
Resources
Goods and Services
Consumption Expenditure
Income
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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
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Circular Flow of Income
• Note:• Total Output = Total Income = Total Expenditure
• O = Y = E
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Circular Flow - Savings and Investment
Y
C
Capital MarketS I
Consumers Producers
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Circular Flow - Savings and Investment
• Y = C + S• O = C + I• Y = O• C + S = C + I• Therefore• S = I
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Circular Flow - Government Sector
Y
GOVERNMENTTAXATION
CAPITAL MARKETS I
C
SPENDINGSUBSIDIES
TAXATIONConsumers Producers
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Circular Flow - Government Sector• Y = C + I + T
• for equilibrium
• S + T = I + G
• if
• S + T > I + G
• then the level of income will fall
• S + T < I + G
• then the level of income will rise
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Circular Flow - Four Sectors
Y
CAPITAL MARKETS I
OVERSEAS SECTOR
GOVERNMENTT
M
G
X
LE
AK
AG
ES
INJE
CT
ION
S
CConsumers Producers
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Circular Flow - Four Sectors
• National Income is determined by total expenditure:
• C + I + G + ( X - M )• also known as Aggregate Demand
• Equilibrium is achieved when Total Leakage = Total Injections:
• S + T + M = I + G + X
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Leaders in finance, accounting
and business advice
Business Systems
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