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

2. Circular Flow of Income • Y = Income • C = Consumption Expenditure • S = Savings • I = Investment • T = Taxation • G = Government Expenditure • M = Imports • X = Exports

3. Income Resources Circular Flow - Simple Consumers Producers Goods and Services Consumption Expenditure

4. 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

5. Circular Flow of Income • Note: • Total Output = Total Income = Total Expenditure • O = Y = E

6. Y Circular Flow - Savings and Investment Consumers Producers C I S Capital Market

7. Circular Flow - Savings and Investment • Y = C + S • O = C + I • Y = O • C + S = C + I • Therefore • S = I

8. Y Producers Circular Flow - Government Sector TAXATION Consumers TAXATION GOVERNMENT SPENDING SUBSIDIES C S CAPITAL MARKET I

9. 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

10. Y Consumers Circular Flow - Four Sectors Producers C S CAPITAL MARKET I LEAKAGES INJECTIONS T GOVERNMENT G M OVERSEAS SECTOR X

11. 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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