1.

The Circular Flow of Income payments for expenses

Circular Flow of Income Resources
a neoclassical economic model depicting how
money flows through the economy. a stock or supply of money, materials, staff, and
economy is modeled as consisting only of other assets that can be drawn on by a person
households and firms or organization in order to function effectively
Money flows to workers in the form of wages Income reward or factor payment
and money flows back to firms in exchange for
products the income people receive for supplying the
economy is made up of countless circular flows factors of production: land, labor, capital or
of income (or money) entrepreneurship

Flow variable
Income Flow
Inflows and outflows of income as revenues Variables that are measured over a period of
and expenses, caused by the operations of a time
business and reflected in its income statement Recurring
Output Flow can be calculated on hourly, weekly, monthly or
yearly basis but they should be measurable only
over a period of time
Expenditure flow
ex. monthly income
equivalent to its total level of output and total
level of income.

Stock variable 2. National Income Accounts

a quantity which is measurable at a particular Consumption goods
point of time, e.g., 4 p.m., 1st January, Monday,
those goods which are used by consumer for
2010, etc.
personal use and they are ready for use as they
ex. Capital, cash in hand are
stock has a reference to a particular date on can be used few times
which it shows stock position; no time length
Investment goods
nonrecurring
are the goods that enable production, and are
Inflow the main input into new installed capital.eg: -
machine, factory, equipment
is the amount of capital coming into a country
also known as capital goods
Cash flow from operating activities is the
amount of money the company receives Government Expenditures
(inflows) from its core business
Spending by the government sector including
Outflow both the purchase of final goods and services,
or gross domestic product, and transfer
a large amount of money that is moved or is
payments
transferred out of a place
Net exports Real GNP

are the value of a country's total exports minus a version of the GNP that has been adjusted for
the value of its total imports. It is a measure the effects of inflation
used to aggregate a country's expenditures or
Balance of trade
gross domestic product in an open economy.
the difference in value between a country's
National income
imports and exports.
the total amount of money earned within a
Balance of payments
country
the difference in total value between payments
GNP
into and out of a country over a period
is a broad measure of a nation's total economic
activity. GNP is the value of all finished goods
and services produced in a country in one year 3. Determination of national income
by its nationals.
Average propensity to consume
Income approach to GNP
refers to the percentage of income spent
Measures the income or earnings received by
on goods and services rather than on
the country’s factors of production (Labor,
Land, Capital) savings. A person can determine the
percentage of income spent by dividing the
GNP = Wages + Interest Income + Rental average household consumption, or what is
Income + Profit
spent, by the average household income, or
Expenditure approach to GNP what is earned.
Measures the amount spent or paid (expended) Marginal propensity to consume
on all goods and services during the year at
market value or prices is a metric that quantifies induced
consumption, the concept that the increase
Deflation in personal consumer spending
is a decrease in the general price level of goods (consumption) occurs with an increase in
and services. Deflation occurs when the disposable income (income after taxes and
inflation rate falls below 0%. transfers)
Consumer price index Full employment equilibrium
a measure that examines the weighted average a macroeconomic term used to describe a
of prices of a basket of consumer goods and
situation where an economy's short-run
services, such as transportation, food and
real gross domestic product (GDP) is lower
medical care. It is calculated by taking price
than that same economy's long-run
changes for each item in the predetermined
basket of goods and averaging them. potential real GDP

Current GNP 45 degree line

In Keynesian economics, this line illustrates

all of the points at which aggregate
expenditures, measured on the y, or National income
vertical axis, are equal to aggregate
is the total value a country's final output of
production, which are measured on the x,
all new goods and services produced in one
or horizontal axis
year
Multiplier
Balance of payments
refers to an economic factor that, when
the difference in total value between
increased or changed, causes increases or
payments into and out of a country over a
changes in many other related economic
period
variables

Consumption

the use of goods and services by

4. Consumption and Income
households Personal disposable income
Income approach to GNP the amount of money that households have
available for spending and saving after
Consumption function
income taxes have been accounted for
or Keynesian consumption function, is an
Engel’s Law
economic formula that represents the
functional relationship between total an observation in economics stating that as
consumption and gross national income income rises, the proportion of income
spent on food falls, even if absolute
Effective demand
expenditure on food rises. In other words,
the level of demand that represents a real the income elasticity of demand of food is
intention to purchase by people with the between 0 and 1. The law was named after
means to pay the statistician Ernst Engel (1821–1896).
Savings Income elasticity of consumption
re what a person has left over when the depends not only on the demand function
cost of his or her consumer expenditure is but also on the characteristics of the supply
subtracted from the amount of disposable function. If supply is not completely elastic,
income earned in a given period of time the income elasticity of consumption will
Investment be less than the income elasticity of
demand, with the difference depending on
The act of committing money or capital to the shapes of both the demand and supply
an endeavor with the expectation of functions.
obtaining an additional income or profit
Income group
Productivity
is the consumption and saving opportunity
is commonly defined as a ratio between the gained by an entity within a specified
output volume and the volume of inputs
timeframe, which is generally expressed in Productivity
monetary terms
is commonly defined as a ratio between the
Determinants of family income output volume and the volume of inputs

Aggregate consumption Inventory investment

is the total of all incomes in an economy a component of gross domestic product

without adjustments for inflation, taxation, (GDP). What is produced in a certain
or types of double counting country is naturally also sold eventually, but
some of the goods produced in a given year
may be sold in a later year rather than in the
5. Investment and Income year they were produced.

Savings Innovations

according to Keynesian economics, are is "a new idea, creative thoughts, new
what a person has left over when the cost imaginations in form of device or method"
of his or her consumer expenditure is Marginal efficiency of investment
subtracted from the amount of disposable
income earned in a given period of time expected rates of return on investment as
additional units of investment are made
Investment
under specified conditions and over a
The act of committing money or capital to stated period of time
an endeavor with the expectation of Interest rate
obtaining an additional income or profit
the proportion of a loan that is charged as
Inflow
interest to the borrower, typically
is the amount of capital coming into a country expressed as an annual percentage of the
loan outstanding
Cash flow from operating activities is the
amount of money the company receives
(inflows) from its core business
6. Aggregate Demand and Supply
Equilibrium
Real-income multiplier
is a condition or state in which economic
forces are balanced. In effect, economic
variables remain unchanged from their Money-income multiplier
equilibrium values in the absence of
external influences.

Capital-output ratio Aggregate demand curve

is the amount of capital needed to produce represents the total quantity of all goods
one unit of output (and services) demanded by the economy
at different price levels
Aggregate supply curve Industry supply curve

describes the relationship between price

levels and the quantity of output that firms
Real wages
are willing to provide
are wages adjusted for inflation, or,
Ranges in aggregate supply curve
equivalently, wages in terms of the amount
is a graphical representation of the relation of goods and services that can be bought
between real production and the price level
Stagflation
Full employment
a condition of slow economic growth and
the condition in which virtually all who are relatively high unemployment, or economic
able and willing to work are employed stagnation, accompanied by rising prices,
or inflation
Production function
Reflate
relates physical output of a production
process to physical inputs or factors of
production
Deregulation
Structural bottlenecks
the reduction or elimination of government
a point of congestion in a production power in a particular industry, usually
system (such as an assembly line or a enacted to create more competition within
computer network) that occurs when the industry
workloads arrive too quickly for the
Removal of constraints
production process to handle

Labor productivity
7. Dynamics of Aggregate Demand and
Supply also known as workforce productivity, is
defined as real economic output per labor
Marginal cost
hour
the cost added by producing one additional
unit of a product or service

Marginal cost curve

A curve that graphically represents the

relation between the marginal cost
incurred by a firm in the short-run product
of a good or service and the quantity of
output produced