1. The Circular Flow of Income

2. The circular flow of income
Firms
Factor
payments
Consumption of
domestically
produced goods
and services (Cd)
Households

3. THE CIRCULAR FLOW OF INCOME
Withdrawals
net saving
net taxes
import expenditure
Injections
investment
government expenditure
export expenditure

4. The circular flow of income
Export
expenditure (X)
INJECTIONS
Government
expenditure (G)
Investment (I)
Consumption of
domestically
produced goods
and services (Cd)
BANKS, etc
Net
saving (S)
ABROAD
Import
expenditure (M)
Factor
payments
GOV.
Net
taxes (T)
WITHDRAWALS

5. THE CIRCULAR FLOW OF INCOME
The relationship between injections and withdrawals
the links between them
planned injections may not equal planned withdrawals
Equilibrium in the circular flow
The circular flow and the four macroeconomic objectives

6. Measuring National Income
The National Economy
Measuring National Income

7. MEASURING NATIONAL INCOME
The three ways of measuring GDP
the production method
the income method
the expenditure method

8. The circular flow of national income and expenditure

9. The circular flow of national income and expenditure
(1) Production
(2) Incomes
(3) Expenditure

10. MEASURING NATIONAL INCOME
The product method
the problem of double counting
the measuring of value added
gross value added (GVA)
some qualifications
stocks
government services
ownership of dwellings
taxes and subsidies on products

11. UK GVA (product-based measure): 2001
Agriculture, forestry and fishing £8 241 m
Mining, energy and water supply £ m
Manufacturing
£ m
Construction £ m
Wholesale and retail trade; repairs £ m
Hotels and restaurants £29 359m
Transport and communication £ m
Banking, finance, insurance, etc. £6 667 m
Letting of property £ m
Public administration and defence £ m
Education, health and social work £ m
Other services £ m
Total GVA £ m
0.9
4.7
17.5
5.4
12.2
3.4
8.0
0.8
24.0
4.8
13.0
5.2
100.0

12. UK GVA (product-based measure): 2001
Agriculture, forestry and fishing £8 241 m
Mining, energy and water supply £ m
Manufacturing
£ m
Construction £ m
Wholesale and retail trade; repairs £ m
Hotels and restaurants £29 359m
Transport and communication £ m
Banking, finance, insurance, etc. £6 667 m
Letting of property £ m
Public administration and defence £ m
Education, health and social work £ m
Other services £ m
Total GVA £ m
0.9
4.7
17.5
5.4
12.2
3.4
8.0
0.8
24.0
4.8
13.0
5.2
100.0

13. UK GVA (product-based measure): 2001
Agriculture, forestry and fishing £8 241 m
Mining, energy and water supply £ m
Manufacturing
£ m
Construction £ m
Wholesale and retail trade; repairs £ m
Hotels and restaurants £29 359m
Transport and communication £ m
Banking, finance, insurance, etc. £6 667 m
Letting of property £ m
Public administration and defence £ m
Education, health and social work £ m
Other services £ m
Total GVA £ m
0.9
4.7
17.5
5.4
12.2
3.4
8.0
0.8
24.0
4.8
13.0
5.2
100.0
Percentage of GVA

14. UK GVA by category of income: 2001
Compensation of employees
(wages and salaries)
£ m
Operating surplus
(gross profit, rent and interest of firms
government and other institutions)
£ m
Mixed incomes
£ m
Tax less subsidies on production
(other than those on products) plus
statistical discrepancy £19 158m
Total GVA £ m
63.6
27.3
6.9
2.2
100.0

15. UK GVA by category of income: 2001
Compensation of employees
(wages and salaries)
£ m
Operating surplus
(gross profit, rent and interest of firms
government and other institutions)
£ m
Mixed incomes
£ m
Tax less subsidies on production
(other than those on products) plus
statistical discrepancy £19 158m
Total GVA £ m
63.6
27.3
6.9
2.2
100.0

16. UK GVA by category of income: 2001
Compensation of employees
(wages and salaries)
£ m
Operating surplus
(gross profit, rent and interest of firms
government and other institutions)
£ m
Mixed incomes
£ m
Tax less subsidies on production
(other than those on products) plus
statistical discrepancy £19 158m
Total GVA £ m
63.6
27.3
6.9
2.2
100.0
Percentage of GVA

17. UK GDP (product-based measure): 2001
GVA (gross value added at basic prices) £ m
plus Taxes on products £ m
less Subsidies on products £6 712m
GDP (at market prices) £ m

18. UK GDP (product-based measure): 2001
GVA (gross value added at basic prices) £ m
plus Taxes on products £ m
less Subsidies on products £6 712m
GDP (at market prices) £ m

19. UK GDP (product-based measure): 2001
GVA (gross value added at basic prices) £ m
plus Taxes on products £ m
less Subsidies on products £6 712m
GDP (at market prices) £ m

20. UK GDP (product-based measure): 2001
GVA (gross value added at basic prices) £ m
plus Taxes on products £ m
less Subsidies on products £6 712m
GDP (at market prices) £ m

21. UK GDP by category of expenditure, GNI and NNI: 2001
£million
Consumption expenditure of households and NPISH (C)
Government final consumption (G)
Gross capital formation (I)
Exports of goods and services (X)
less Imports of goods and services (M) 
Statistical discrepancy 499
Gross domestic product (GDP) (at market prices)

22. UK GDP by category of expenditure, GNI and NNI: 2001
£million
Consumption expenditure of households and NPISH (C)
Government final consumption (G)
Gross capital formation (I)
Exports of goods and services (X)
less Imports of goods and services (M) 
Statistical discrepancy 499
Gross domestic product (GDP) (at market prices)
plus Net income from abroad 5 756
Gross national income (GNI)

23. UK GDP by category of expenditure, GNI and NNI: 2001
£million
Consumption expenditure of households and NPISH (C)
Government final consumption (G)
Gross capital formation (I)
Exports of goods and services (X)
less Imports of goods and services (M) 
Statistical discrepancy 499
Gross domestic product (GDP) (at market prices)
plus Net income from abroad 5 756
Gross national income (GNI)
less Capital consumption (depreciation)
Net national income (NNI)

24. Macroeconomic equilibrium
In a very simple economy, it must be that:
Y = C + I
Y = C + S
C + S = C + I i.e. S = I
Actual savings are by definition equal to actual investment by it is by no means guaranteed that planned savings match planned investments
The saving and investment decisions are taken by various groups, and if there is a mismatch, instability may be generated

25. All income is consumed GNI = GNP = 100
Consumption = 100
Households
Firms
GNI = 100
What happens if households want to save part of their income (S = 10) ?

26. Planned savings equal planned investments
Consumption = 90
Households
Firms
S=10
I=10
Capital- market
GNI = 100
Savings are a leakage (withdrawal) from the circular flow

27. Households want to save more
Consumption = 80
Households
Firms
S=20
I=10
Capital- market
GNI = 100
There is an unplanned increase in inventories since households save more

28. Households want to save more
Consumption = 40
Households
Firms
S=10
I=10
Capital- market
GNI = 50
The equilibrium level of income is reduced as firms cut back on production.