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The movement of spending and income throughout the economy.

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Presentation on theme: "The movement of spending and income throughout the economy."— Presentation transcript:

1 The movement of spending and income throughout the economy

2  Explain the Circular Flow of Income.  Recall how leakages and injections affect the circular flow. 2

3 3 The Circular Flow Of Income Households Firms Factor Services Factor Incomes Factor Services Factor Incomes Wages/Salaries Interest Profit Rent Labour Capital Entrepreneur Land Spending Products

4 4 But there are complications…. Not all FACTOR INCOME is spent on US goods. There are leakages from income. What do you think these are?: Taxation - taken from wages and off the price of goods (VAT) etc Savings – households may not spend all their income Imports – households and firms may spend on imports. ALL OF THE ABOVE ARE LEAKAGES FROM US INCOME

5 5 The Circular Flow Of Income Households Firms Factor Services Factor Incomes Spending Products Tax Savings Imports

6 6 These LEAKAGES reduce the circular flow of income WHY ? They represent money leaving US Income :  Taxation goes to government.  Savings are put into bank accounts.  Import spending goes abroad.

7 7 INJECTIONS In contrast, there are 3 forms of spending that are injected into the flow. Injection: Additions of extra spending into the circular flow of income These are ; N.B Injections come from outside of the circular flow. They increase the circular flow. Exports are goods sold by US firms abroad Government Spending Investment Exports What are each of the above? Government spending is money spent by the government on NHS, defence, benefits, education etc. Investment is money spent by firms on capital goods.

8 8 Households Firms Factor Services Factor Incomes Spending Products Tax Savings Imports Exports Investment Government Spending The Circular Flow Of Income

9 9 WHAT DO INJECTIONS AND LEAKAGES DO TO THE CIRCULAR FLOW OF INCOME? If Injections > Leakages then…. ? If Leakages > Injections then…. ? If Injections = Leakages then…. ? Income Rises Income Falls Income Stays the Same

10 1. What is the circular flow of income? 2. What is an injection? 3. What is a leakage? 4. What are the 3 leakages and 3 injections? 5. Draw it. 10


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