Scribd
Upload
63 views4 pages

Edexcel Economics AS-level: Unit and

The document discusses the circular flow of income in 3 key points: 1) It describes the basic circular flow model where households supply factors of production to firms in exchange for wages and dividends, and firms supply goods and services to households in exchange for revenue. 2) It notes that savings, taxes, government spending, and international trade can inject or withdraw from the circular flow of income, with the economy reaching equilibrium when injections equal withdrawals. 3) It explains the distinctions between income, which is money received regularly, and wealth, which is a stock of assets, and how changes in injections and withdrawals can expand or contract national output.

Uploaded by

Mijwad Ahmed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
63 views4 pages

Edexcel Economics AS-level: Unit and

The document discusses the circular flow of income in 3 key points: 1) It describes the basic circular flow model where households supply factors of production to firms in exchange for wages and dividends, and firms supply goods and services to households in exchange for revenue. 2) It notes that savings, taxes, government spending, and international trade can inject or withdraw from the circular flow of income, with the economy reaching equilibrium when injections equal withdrawals. 3) It explains the distinctions between income, which is money received regularly, and wealth, which is a stock of assets, and how changes in injections and withdrawals can expand or contract national output.

Uploaded by

Mijwad Ahmed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 4

Edexcel​ ​Economics​ ​AS-level

Unit​ ​2:​ ​Macroeconomic​ ​Performance


and​ ​Policy

Topic​ ​2:​ The Circular Flow of


Income
2.1 The circular flow of income

Notes

www.pmt.education
The circular flow of income

Firms and households interact and exchange resources in an economy.


Households supply firms with the factors of production, such as labour and capital,
and in return, they receive wages and dividends.
Firms supply goods and services to households. Consumers pay firms for these.
This spending and income circulates around the economy in the circular flow of
income, which is represented in the diagram above.

Saving income removes it from the circular flow. This is a withdrawal of income.
Taxes are also a withdrawal of income, whilst government spending on public and
merit goods, and welfare payments, are injections into the economy.

International trade is also included in the circular flow of income. Exports are an
injection into the economy, since goods and services are sold to foreign countries
and revenue in earned from the sale. Imports are a withdrawal from the economy,
since money leaves the country when goods and services are bought from abroad.

The economy reaches a state of equilibrium when the rate of withdrawals = the rate
of injections.

The full circular flow of income can be derived from this:

www.pmt.education
It is important to remember that income = output = expenditure in the circular flow.

The distinction between income and wealth

Wealth is defined as a stock of assets, such as a house, shares, land, cars and savings.
Wealth inequality is the unequal distribution of these assets.

Income is money received on a regular basis. For example, it could be from a job,
welfare payments, interest or dividends. When income is unevenly distributed across
a nation, income inequality is said to exist.

The effect of changes in injections and withdrawals on national income

An injection into the circular flow of income is money which enters the economy.
This is in the form of government spending, investment and exports.

A withdrawal from the circular flow of income is money which leaves the economy.
This can be from taxes, saving and imports.

www.pmt.education
The amount of savings in an economy is equal to the amount of investment. In the
UK, there is a traditionally low savings rate, especially during periods of high
economic growth, and this means that the rate of investment is also low. In Japan
there is a high savings rate and with this comes a high level of investment.

If there are net injections into the economy, there will be an expansion of national
output.

If there are net withdrawals from the economy, there will be a contraction of
production, so output decreases.

www.pmt.education

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy