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THE CIRCULAR FLOW OF INCOME

THE CIRCULAR FLOW OF INCOME. The movement of spending and income throughout the economy. I can. Explain the Circular Flow of Income. Recall how leakages and injections affect the circular flow. The Circular Flow Of Income. Spending. Households. Products. Factor Services. Factor Incomes.

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THE CIRCULAR FLOW OF INCOME

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  1. THE CIRCULAR FLOW OF INCOME The movement of spending and income throughout the economy

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

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

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

  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. 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 ; • 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. • Exports are goods sold by US firms abroad N.B Injections come from outside of the circular flow. They increase the circular flow.

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

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

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

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