1  To define the terms in the Circular flow of income  Explain the inter-relationship between expenditure, income and production  To explain why injections = leakages.  There are ‘measuring national income’ notes to go along with this powerpoint.

2 Households FIRMS Government

3 Goods and services FOP Input: Households Firms Household includes workers, managers, entrepreneurs etc. i.e. people

4 Spending on goods and services FOP incomes HouseholdsFirms

5 Spending on goods and services Goods and services Services of productive factors Factor incomes Households Firms

6  Expenditure  the sum of expenditures in the economy  Income  the sum of incomes all factor incomes  Output  the sum of output (value added) produced in the economy  All three approaches are should give you the same final figure for national output

7 Spending on goods and services Goods and services Services of productive factors Factor incomes Households Firms Expenditure Output Income 3 d i f f e r e n t w a y o f m e a s u r i n g t h e e c o n o m i c a c t i v i t y i n t h e e c o n o m y

8  Total value added  is the economy’s net output after deducting goods used during production  to avoid double counting  E.g. egg, milk, flour used for making muffins. MUFFINS. Final Good.  Gross domestic product (GDP)  measures the output produced by factors of production located in the domestic economy over a period of time, usually a year.

9  Leakages (in terms of flow of payment)  money paid to the households but not returned to firm  Or flow of payments that started from firms but did not return back to firms  e.g. household savings, net taxes and imports

10 Spending on goods and services Factor incomes Households Firms Leakages

11  Injections (in terms of flow of payment)  are revenue for firms not from sales to household  e.g. investment by firms, government purchases and exports

12 Spending on goods and services Factor incomes HouseholdsFirms Injections

13  Government  spends money on goods & services (G)  finances welfare payments, i.e. transfer payments (B) this spending is financed by taxes (T) Foreign Sector:  Export (X)  made at local economy but sold abroad  Import (M)  made abroad and bought at local economy.

14  Domestic Output (GDP) is either  Consumed (C)  Invested (I) (INCREASE IN STOCK OF CAPITAL)  Bought by the Government (G)  Bought by the foreigners, net exports (X-M)  Factor Incomes are spent on  Consumption (C)  Saving (S)  Paying taxes net of benefits (T-B)

15 GDP = C + I + G + (X – M) Factor Income = C + S + (T – B) Since everything produced in the economy generates equivalent factor income Domestic Output (GDP) = Factor Incomes

16 Domestic Output C + I + G + (X – M)C + S + (T – B) = Factor Incomes C: Consumption I: Investment G: Government Expenditure X-M: Net exports C: Consumed S: Savings T-B: Taxes Net of Benefits

17 Domestic Output C + I + G + (X – M)C + S + (T – B) = Factor Incomes rearrange I + G + X S + (T – B) + M = Total InjectionsTotal Leakages

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19  Y= National Income  C = Consumption  I = Investment  G = Government Expenditure  (X-M) =Net Exports GDP = C + I + G + (X – M)

20  Gross domestic product (GDP)  measures the output produced by factors of production located in the domestic economy over a period of time, usually a year.

21  Gross National Product (GNP)  total income of citizens wherever it is earned = GDP + Net Property Income (NPI) IF GDP < NPI the citizens of the local economy are producing less than the citizens from abroad. It means that citizens from abroad in the local economy plus locals make the local economy GDP smaller than its Citizens abroad and in the local economy together GNP.

22 Depreciation:  Gross: DOES NOT TAKE IN ACCOUNT DEPRECIATION (wear and tear of capital stock). Only the increase in stock.  Net National Product = GNP – Depreciation

23  Nominal GDP / GNP  Measures national output at current prices = value of all goods at current prices  Real GDP / GNP  Measures output at base year prices e.g. value of today's national output at 1995 prices  Allows us eliminate the effect of price changes and see how real output evolves over time

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26 Who’s the richest?

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29  Does NOT take in account other variables like:  Does not separate K or C goods.  Underground economy is not taken in account  Externalities are not taken in account.  Self consumption activities or household activities are not taken in account.  Other issues which reflect standard of living. Education, Health, environment, security, freedom, discrimination, etc…  Income distribution (inequality) Income distribution (inequality)

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