1. 2.4.1and 2.4.2 unit content Students should be able to: Define national income and show that it can be seen as a circular flow (and draw this) Explain the difference between wealth (concept of stock) and income (flow) Assess the likely correlation between income and wealth Analyze the impact of injections into, and withdrawals from, the circular flow of income (e.g. an increase in investment may increase spending in an economy as well as productive capacity)

2. The circular flow of income: households and firms Households Firms Payment of factors £10m from firms to households: rent, wages, interest, profit from Payment for goods and services £10m from households to firms Factor inputs (hire of factors): land, labour, capital, enterprise e.g. labour from households works for firms Outputs: Goods and services

3. The stock of money The stock of money in the economy is £10m, which flows round the economy from households to firms to households. If the £10m changes hands more than once during the time period then income earned will be greater than the amount of money in the economy.

4. What does the stock of money create? The stock of money creates a flow of goods and services as firms have produced £10m of output. The value of the total national output or GDP is £10m Households have earned £10m so the value of national income is £10m

5. Simplified model and GDP So in this simplified model GDP = National output = National income = National expenditure Firms hire factors of production in order to produce goods. The owners of the factors live in households so the four factors of production are hired from households.

6. Recap factors of production What are the factors of production? In return for their work the factors are paid their factor prices, what are these?

7. Why is the flow of money circular? income earned by the households allows them to _____ the goods and services sold by the firms firms use the factors of production to ________ goods and services households buy the goods with the money they have __________ in working for the firms money passes from firms to households and then back again

8. The circular flow must balance As it is a closed system, these flows must balance This means that there are three ways in which the total amount of economic activity in this economy can be measured. It can be measured by: total i__________ total o__________ total e__________

9. The three measures of GDP In practice, when the ONS measures incomes, output and total expenditure the three answers are never quite the same, why? The published data for GDP are therefore calculated as the average of these three measures, each of which gives information about different aspects of a society’s total resources.

10. The expenditure-side estimate of GDP This describes how those resources are being used, so that it can be seen what proportion of society’s resources is being used for consumption and what for investment.

11. The income-side estimate of GDP This describes how households earn their income. It explains about the balance between rewards to labour (e.g. wages), capital (interest), land (rent) and enterprise (profits).

12. The output-side estimate of GDP This focuses on the economic structure of the economy. One way countries differ is in the balance between primary production (e.g. ____________), secondary activity (e.g. ____________), and tertiary activity (e.g. ______________). Which activity has increased in importance in the UK in recent years?

13. The circular flow of income in real life! Households and firms don’t spend all of their income on the products of domestic firms and firms don’t spend all of their revenue hiring domestic factors Injections are money that originates outside the circular flow and so will increase national income/output/expenditure e.g. Withdrawals are any money not passed on in the circular flow and has the effect of reducing national income/output/expenditure e.g.

14. National income and injections or withdrawals What is the effect of increases in injections on the level of national income? What is the effect of increases in leakages or withdrawals on the size of the national economy?

15. Investment and savings Investment represents an a__________ to the circular flow as it is revenue for firms that does not arise from household spending. Investment is only carried out by firms. It refers to expenditure by firms on ____________________ ________________________________________ By undertaking investment, firms add to the productive capacity of the economy, and thus enable economic growth to take place.

16. Savings Saving is a w______________ as it is money put aside by both households and firms to meet future expenditure and is not passed on in the circular flow to domestic firms or households.

17. What happens to savings as incomes change? Savings are expected to _______ as income increases and _______ as incomes falls. They are income induced. Since saving implies reduced consumption by households and reduced expenditure by firms we would expect aggregate demand in the economy to decrease.

18. The circular flow of income: government expenditure and taxes Government expenditure is an ____________ for firms (e.g. government contracts or grants) and for households (e.g. employment or benefits) Taxes reduce the amount that firms and households have to spend. They represent a ___________ from the circular flow

19. The circular flow of income: imports and exports The UK is not a closed economy but is open as it is involved in international trade. Imports (M) are a __________ as they represent spending that is not passed in the circular flow Exports (X) are an _____________ as they originate outside the flow and increase the size of the national income.

20. The circular flow of income diagram: Households Firms Leakages / withdrawals Saving (S) Taxes (T) Imports (M) Injections Investment (I) Government expenditure (G) Exports (X)

21. The effect of foreign trade on the economy If exports exceed imports what will be the effect on national income? If imports are greater than exports then?

22. Fiscal policy Fiscal policy refers to government ___________ and __________________ Governments can change taxes and/or expenditure in order to try and control aggregate demand.

23. Income and wealth In economics, income is a flow – it means the amount of money that is earned during a period. Wealth is a stock – it refers to the accumulation of assets, such as __________ or ______________. These assets have been built up from past i________.

24. Wealth in the UK What do you know about wealth in the UK?

25. Do households with high incomes always have high wealth in the UK?

26. What has happened to distribution of wealth over time in the UK?

27. How do we measure poverty? Absolute poverty is defined where a household? Globally, the UN Development Programme regards households in which income is less than a $1 a day (the poverty line) as being in absolute poverty. Relative poverty is when? Which sort of poverty must always be present?

28. Percentage below the poverty line The percentage falling below the poverty line is not a totally reliable measure on its own: it is important to know how far below the line households are falling. The income gap (distance between household income and the poverty line) is a useful measure Many people don’t know where they are – 19% of Americans believe they are in the top 1% of earners!

29. Real GDP per head in the UK

30. Real household disposable income Median equivalent £ per year