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1、Diagram of circular flow of incomeenterprise1Injections and withdrawsKnowdefinitions, examples, and influence on the circular flow of income.Thereare3setsofinjectionsandwithdrawalswhichcanalterthecircularflowofincomeinaneconomy.Injection (J) is money entering the flow.InjectionsincludeInvestment,gov
2、ernmentspendingandExports.Withdrawal (W) is money leaving the flow.Withdrawalsincludesaving,taxationandimports.2InvestmentIneconomics,investmentisbuyingandproducingcapitalgoodswhicharenotconsumedbutaretobeusedforfutureproduction.Examplesincludetangibles(suchasbuildingarailroadorfactory)andintangible
3、s(suchasayearofschoolingoron-the-jobtraining),etc.Moreinvestmentmeansthatmoreproductionandmoreemployment,andmoreincomecirculateandthuseconomicactivityisincreased.3Saving Ineconomics,personalsavinghasbeendefinedaspersonaldisposableincomeminuspersonalconsumptionexpenditure.Forexample,householdsdeposit
4、moneyintobanksorotherfinancialinstitutions,orjustretainmoneyintreasuries.Ifacountrysavestoomuchofitsincomethisiswithdrawnfromthecircularflowandtheflowwilldecrease.Thismeansthatlessincomecirculatesandeconomicactivityisreduced.4Government Spending (G) and Taxation (T)Government taxesboththehouseholdan
5、dbusiness,sothattaxes(T)arewithdraw.Example:directtax(incometax)andindirecttax(salestaxes).Indetail,valueaddedtax(VAT),Capitalgainstax,Corporationtax,EnvironmentAffectingTax,Inheritancetax,Propertytax,etc.Increasingtaxeswilldecreasedisposableincome,thuslessincomecirculatesandeconomicactivityisreduce
6、d.Thegovernmentpurchasesgoodsandservicesfromthebusiness,andgivestransferpayments,sothatgovernment spending (G)isinjection.(G)includes:investmentdirectlyintotheeconomyintheformofgrants,businessallowances,investmentinroads,hospitals,housing,investmentinnationalisedindustries,andtheWelfareState,pension
7、s,unemploymentbenefitsandothertransferpayments(TP).Increasinginvestmentandspendingbygovernmentwillincreaseemploymentandproduction,thusmoreincomecirculatesandeconomicactivitywillbeincreased.5Exports (E) and Imports (M)Exports: goodsandservicesareproducedinonecountryandsoldabroad.Thepaymentforthemwill
8、returntothefirmsinthiscountry.Thus,itisaninjection.Example:Thisincreasesthecircularflowandcreatesmoreeconomicactivityintheeconomy.Imports:goodsandserviceswhichareboughtfromothercountriesandconstituteawithdrawfromthecircularflowofincomeandentertheflowofincomeofanothercountry.Example:Thisdecreasesthec
9、ircularflowandcauseslesseconomicactivityintheeconomy.6Difficulties of measuring National Income1.Arbitrarydefinitionofproduction(whatshouldandshouldnotbemeasured).2.Valueofservicerenderedbyconsumerdurablegoods.3.InadequateInformation.4.Dangerofdoublecounting.5.Problemsinmakingcomparisonsovertimeandb
10、etweencountries.7Arbitrary exclusionAnumberofitemsareexcludedinthemeasurementofNI,eventhoughtheyoftendorepresentrealproductiveeffort.UndergroundactivitiesIllegalactivitiesUnreported(butlegal)activitiesNon-marketactivitiesServicesofhomemakersDIYproductionVolunteerservices8Other difficulties of measur
11、ing NI“Notionalrent”ofowner-occupiedhousesiscountedinNIlikerealrentofpropertyforletting,andhencepreventsGDPfalling.Thereisdangerofdoublecountingsuchastaxes,transferpayments,stockappreciation,andinputbyothers.Inadequateinformation.Thesourcesfromwhichdataareobtainedwerenotspecificallydesignedtoprovide
12、informationforNIcalculations.Inaddition,capitalconsumptionoffixedassetsisthemajorproblem,becausethereisnoaccuratefigureforrealdepreciation.Problemsinmakingcomparisonsovertimeandbetweencountries.9How to compare growth rates of different countriesNIgrowthrate(%)country 200020012002A3.52.61.8B2.54.53.1
13、C1.92.53.210Weaknesses of NI as indication of standard of livingNIisthenearestindicationofwelfare.ButNIcannotbeacceptedsolelyonitsfacevalue.Thefollowingqualificationsmustbemade:Theriseingenerallevelofprice:inflation.Populationlevelchanges.Theproportionofconsumerandproducergoodsmaychange.ChangeinNIma
14、ybeduetosurplusofexportsoverimports.Unfairdistributionofthewealth.Onlyasmallminorityofwealthypeopleconsumetheextragoods.Paidservicesmaybecomemore.Environmentalproblems.11To compare Standards of Living of different countriesWhenusedforinternationalcomparison,GNPstatisticsaresubjecttoqualificationsina
15、dditiontothosementionedabove.Exchangeratesmaynotreflectaccuratelytheinternalpurchasingpowerofcurrencies.Tastesandneedsvarybetweencountries.TheproportionofGNPspentondefenseandsocialservicesvaries.Countriesvaryinaverageworkingweek,proportionofwomenworkers,numberofjobsdonebythemselves,accuracyoftaxretu
16、rns.12MultiplierAnychangeinthelevelofinjectionsorwithdrawalswillbringaboutachangeinthelevelofNationalIncome.ThechangeinNationalIncomewillberelatively greater than the initial change.Thisisknownasthe“Multiplier”effect.Anotherdefinition:theadditional shiftsinaggregatedemandthatresultwhenexpansionaryfi
17、scalpolicyincreasesincomeandtherebyincreasesconsumerspending.13Marginal propensity to consume and saveMarginal Propensity to Consume (MPC): ratioofthechangeinconsumptiontothecorrespondingchangeinincome.Marginal propensity to save (MPS): ratioofthechangeinsavingtocorrespondingchangeinincome.14Formula
18、e of MPC and MPS15Multiplier formulaAchangeinaninjectioncanhaveamultipliereffect.E.g:MPC=0.6andtheMPS=0.4,andthereisanincreaseininvestmentof1million,thevalueofthemultiplierwillbe:1millionx(10.4)=2.5million,meaningthat1millioninvestmentincreasewillincreasenationalincomeby2.5times.16An example for mul
19、tiplier effect(investment)(Ultimateinjection)17Explanation of multiplier effect1.Incomeandemploymentisgenerated,outputrises,someofthemoneydisappearsasaleakage.2.Theremainingmoneygoesroundthesystemagain,generatingmoreincome,employmentandoutput.Again,somemoremoneyleaksout.3.Thisprocesscontinueswithinc
20、omeandemploymentbeinggeneratedandoutputincreasing.Theamountsgoingroundthesystemgetsmallerandsmaller.18Graph of multiplier effects19Explain nominal and real growth rateNIgrowthrate(%)country 200020012002A3.52.61.8B2.54.53.1C1.92.53.220How to explain nominal and real NINominal NIisthevalueofNIintermso
21、fpriceprevailingatthetimeofmeasurement.Real NI isthevalueofNImeasuredintermsofpricesprevailinginagivenbaseyear.Growthratesinthetablearenominalgrowthrates.WehavetoknowrealgrowthratetotellwhetherwhichcountrysNIreallygrew.Forgettingrealgrowthrate,weneedtoknowinflationrateorCPI(RPIinUK).Ifinflationratei
22、sbiggerthanthenominalgrowthrate,thentherealNIdidnotincrease.21Nominal and real NIInflationincreasesthemoneyvalueofnationalincomebutdoesnotprovideuswithanymoregoodstoconsume.RealNational Incomeisfoundbyapplyingtheequation: RealNationalIncome=StandardofLiving=22New wordsParticipant,complex,involve,sampling, substantially23
