The Circular Flow of Income

?
  • National income: measures the flow of new output produced in the economy by measuring the incomes received by labour & other factors of production when producing the goods & services.
  • National output: measures the flow of new output produced in the economy by measuring the actual goods & services produced by the economy.
  • National expenditure: measures the flow of new output produced in the economy through the spending of these incomes on the goods & services.
  • (Above) are 3 different ways of measuring the same thing (the flow of new output), therefore: national income = national output = national expenditure.
  • At full employment (i.e. when everybody of working age who wants a job at current wage rates has one), national income, national output & national expenditure are all equal to the "full-employment income".

The Simple Circular Flow of Income (Closed Economy):

  • A simple circular flow model assumes that there are just two sets of economic agents: households & firms. This is a model of a closed economy with no gvnmt sector.
  • There are 2 flows: 1) A physical flow (shown by straight arrows)

Comments

No comments have yet been made