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    Circular Flow of Income

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    Sunny Deo Bhakta
    The document describes the circular flow of income and production in an economy, with payments for resources from firms to households and spending from households on goods and services completing the cycle. It explains how the flows can be impacted by leakages from savings and taxes, as well as injections from investment and government spending. Diagrams are presented to illustrate the circular flow between households and businesses and how sectors like government and foreign trade can be incorporated.

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    Circular Flow of Income

    Uploaded by

    Sunny Deo Bhakta
    133 views15 pages
    The document describes the circular flow of income and production in an economy, with payments for resources from firms to households and spending from households on goods and services completing the cycle. It explains how the flows can be impacted by leakages from savings and taxes, as well as injections from investment and government spending. Diagrams are presented to illustrate the circular flow between households and businesses and how sectors like government and foreign trade can be incorporated.

    Original Description:

    Welfare Economics

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    © Attribution Non-Commercial (BY-NC)

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    The document describes the circular flow of income and production in an economy, with payments for resources from firms to households and spending from households on goods and services completing the cycle. It explains how the flows can be impacted by leakages from savings and taxes, as well as injections from investment and government spending. Diagrams are presented to illustrate the circular flow between households and businesses and how sectors like government and foreign trade can be incorporated.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    133 views15 pages

    Circular Flow of Income

    Uploaded by

    Sunny Deo Bhakta
    The document describes the circular flow of income and production in an economy, with payments for resources from firms to households and spending from households on goods and services completing the cycle. It explains how the flows can be impacted by leakages from savings and taxes, as well as injections from investment and government spending. Diagrams are presented to illustrate the circular flow between households and businesses and how sectors like government and foreign trade can be incorporated.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 15

    The Circular-Flow of Income

    Circular Flow of Income

     Because land, labor, and capital are


    generally owned by households, firms
    must pay for their use
     This payment, along with profits, become
    income and purchasing power that can
    be used to buy goods and services
     These payments are referred to as
    resource income
    Circular Flow of Income
     The demand for goods and services by the
    recipients of resource income leads to more
    output, which in turn brings about
    additional payments of resource income
     This cyclical operation of demand, output,
    income, and new demand is illustrated by
    the circular flow of income diagram
     The size of the circular flow measures the
    level of income and output in the economy
    The Circular-Flow Diagram
    Revenue Market for Spending
    Goods
    Goods & Goods &
    Services sold and Services Services bought

    Firms
    Households

    Labor, land,
    Inputs for capital &
    production Market for
    Entrepreneur
    Factors
    Wages, rent, , rate of of Production Income
    interest & profit
    Leakages
     Resource income and spending are
    not always equal because of leakages
     Flows out of the circular flow that
    occur when resource income is
    received and not spent directly on
    purchases from domestic firms
     Saving
     Taxes
    Injections
     However, at least some of these
    leakages are returned to the circular
    flow via various injections
     Added spending in the circular flow
    that is not paid for out of current
    resource income
     Investment
     Government spending,
     Exports bought by foreign buyers
    Savings and Investment

     Leakage in the circular flow


     Saving
     Injection in the circular flow
     Investment
    Spending to purchase capital goods
    Three Sector Model – Government
    Include in Circular Flow
     In a three sector model the Government sector is
    included as part of the circular flow model
     How does the Government affect the equilibrium
    in the circular flow model?
    1) Withdraw amounts from the circular flow through taxes
    (T) – transfer payments
    2) Inject amounts into the circular flow through
    government purchases - expenditure
     These Government actions affect both Households
    and Firms
    Three Sector Model – Government
    Include in Circular Flow
     Points to note:
     Taxes gain by Government is the net of taxes after transfers
    has been deducted
     That is: Net taxes = T = Taxes – Transfer payments
     Why transfer payments are not included in government
    purchases?
    – transfer payments do not require that the recipient produce a good
    or service in order to receive them
    – examples of transfers payments include social security, welfare,
    and unemployment benefits
    – these are regarded as compensation and are not counted in
    government purchases
    Three Sector Model – Government
    Include in Circular Flow
     Points to note:
     Transfer payments and government purchases are both
    parts of government spending

     But government purchases are represented on a circular


    flow diagram as flows of money from government to
    firms and goods and services from firms to government

     Government Purchases - are the sum of purchases of


    goods and services from firms by government agencies,
    plus the total value of output produced by government
    agencies
    Three Sector Model – Government
    Include in Circular Flow
    Four Sector Model – Foreign Sector
    Include in Circular Flow
     In a four sector model the Foreign sector is
    included as part of the circular flow model

     How does the Foreign sector affect the


    equilibrium in the circular flow model?
    1) Withdraw amounts from the circular flow through
    import payments (M)
    2) Inject amounts into the circular flow through export
    receipts (X)
    Four Sector Model – Foreign Sector
    Include in Circular Flow
    Withdrawal
    Loans for
    investment Producers
    Banks
    consumer spending (C)
    Savings (S) Export receipts (X)
    Purchases/spending (G)

    Transfers Taxes
    Firms
    Foreign
    Household Government Sector
    s Taxes Subsidies
    Import payments (M)

    Factor income – wages, profits


    etc (Y)
    Four Sector Model – Foreign Sector
    Include in Circular Flow
    Government and the Circular
    Flow
     A balanced budget
     The amount spent by the government =
    The amount collected in taxes
     A surplus budget
     The amount spent by the government <
    amount collected in taxes
     A deficit budget
     The amount spent by the government >
    amount collected in taxes

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