Exam (elaborations)
circular flow
- Institution
- University Of Cape Town (UCT)
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By: jackyv • 7 year ago
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National Income AccountingMacroeconomic objectives
Economic growth
Full employment
Price stability
Balance of payment stability
Equal distribution of income
Measuring the circular flow of income:
Circular flow model is used to show the economic relationship between the
different sectors of the economy
It highlights the real flows( factors of production & output) and the
money flows ( income & expenditure)
GDE is expenditure by domestic sectors on final output produced at home or
abroad
GDP is the value of the final output produced within the borders of a country
within a given period.
The circular flow shows the flows of expenditure, income, and output for an
economy over a period of usually a year
Open economy trades with the rest of the world
Closed economy doesn’t trade with rest of the world
The firms/government buy factors of production in the factor market and in
return the owners of the factors of production, the household sector, are paid
in income. The income that households earn is taxed by the government.
We assume that all income earned by FoP is spent and that all the output
produced is sold
Leakages: amount of money that flows out of the circular flow of income and
expenditure
Taxes( indirect & direct)
Expenditure on imports
Savings
L = S+M+T
Direct taxes are taxes on income
Indirect taxes are taxes on expenditure (VAT)
Injections: add money to the circular flow of income and expenditure
Investment expenditure by firms(investment)
Government spending
Exports
J=I+G+X
,
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