1 Leaders in finance, accounting and business advice Business Systems Circular Flow of Income.

1

Leaders in finance, accounting

and business advice

Business Systems

Circular Flow of Income

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Circular Flow of Income• Y = Income

• C = Consumption Expenditure

• S = Savings

• I = Investment

• T = Taxation

• G = Government Expenditure

• M = Imports

• X = Exports

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Circular Flow - Simple

Consumers Producers

Resources

Goods and Services

Consumption Expenditure

Income

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Circular Flow - Simple• Assumptions:

– Only two sectors - Consumers and Producers– All production is sold to the consumers– Producers provide all the Goods and Services– Consumers spend all their Income on goods an

services– No government and no overseas sectors– Consumers are the owners of productive resource -

land, labour, capital and enterprise

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Circular Flow of Income

• Note:• Total Output = Total Income = Total Expenditure

• O = Y = E

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Circular Flow - Savings and Investment

Y

C

Capital MarketS I

Consumers Producers

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Circular Flow - Savings and Investment

• Y = C + S• O = C + I• Y = O• C + S = C + I• Therefore• S = I

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Circular Flow - Government Sector

Y

GOVERNMENTTAXATION

CAPITAL MARKETS I

C

SPENDINGSUBSIDIES

TAXATIONConsumers Producers

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Circular Flow - Government Sector• Y = C + I + T

• for equilibrium

• S + T = I + G

• if

• S + T > I + G

• then the level of income will fall

• S + T < I + G

• then the level of income will rise

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Circular Flow - Four Sectors

Y

CAPITAL MARKETS I

OVERSEAS SECTOR

GOVERNMENTT

M

G

X

LE

AK

AG

ES

INJE

CT

ION

S

CConsumers Producers

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Circular Flow - Four Sectors

• National Income is determined by total expenditure:

• C + I + G + ( X - M )• also known as Aggregate Demand

• Equilibrium is achieved when Total Leakage = Total Injections:

• S + T + M = I + G + X

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Leaders in finance, accounting

and business advice

Business Systems

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