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Section 7 - Circular flow of income - Coggle Diagram
Section 7 - Circular flow of income
Circular flow of income
An economy is made up of firms and households
Households provide labour, land and capital that firms use to produce output. THe money paid to households by firms for these FOPs is national input
Households spend money from their income on goods and services, the value of this spending is national expenditure
National output = National input = Expenditure
Injections and withdrawls
Injections - Exports, government spend and Investment
Withdrawls - imports, taxation, Savings
If injections = withdrawls, economy is in equilibrium
If injections > withdrawls, expenditure > output, so firms will increase output
If withdrawls > injections, output > expenditure, so firms will decrease output, national output, income and expenditure decrease
Multiplier effect
When an injection is made, the actual change in national income is bigger than the initial injection (multiplier effect)
Size of the multiplier effect depends on the rate at which money leaks from the circular flow, greater leakages mean money leaves more quickly and a smaller multiplier effect
If lots of money is spent on imports, multiplier effect will be quite small because the injection quickly leaks out of the circular flow
Income and weatlh
Income
Flow of money going to factors of production
Wages and salaries from jobs
Rental income form property
Interest from savings
Profits flowing to shareholders
Wealth
Wealth is the current value of a stock fo assets owned by something or society as a whole
Savings in a bank account
Ownership of a property
Shares in a business
Wealth held in pension schemes
What national income measures
Real GDP - Value of GDp adjusted for inflation
Nominal GDP - value of GDP without beind adjusted for inflation
GNP - Market value of all products produced in an annum by the citizens of one country. It includes income earned from overseas minues income earned by overseas residents
GNI - Sum of value added by all producers who reside in a nation, plus receiplts of primary income from abroad
Accelerator
Level of investment in an economy is related to the change in GDP
Higher rate of economic growth causes more investment