MACRO; Circular Flow of Income

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  • Circular Flow of Income
    • Closed Economy
      • Firms produce goods and services; national output
        • Goods and service represent the physical flow i.e. 'real things'
        • Households provide factors of production and in return receive money; national income
          • National output = national income = national expenditure
          • households spend income on goods and services; national expenditure
            • money represents the monetary flow i.e. money that pays for physical things
      • households spend income on goods and services; national expenditure
        • money represents the monetary flow i.e. money that pays for physical things
      • Households provide factors of production and in return receive money; national income
        • National output = national income = national expenditure
    • Open Economy
      • INJECTIONS
        • Government Spending
        • Investments
        • Exports
        • Equilibrium occurs when leakages = injections
      • LEAKAGES
        • Taxation
        • Savings
        • Imports
        • Equilibrium occurs when leakages = injections
      • Injection > Leakages
        • Means expenditure > output
        • Firms will increase output
        • National income, output and expenditure will also increase
      • Injections < Leakages
        • Means output > expenditure
        • national income, output and expenditure will also decrease
        • Firms will reduce output

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