circular flow of income illustrates how output generates income which is then spent, coming full...
Post on 13-Dec-2015
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Circular Flow of Income
• illustrates how output generates income which is then spent, coming full circle through the economy
• the relationship between governments, households, firms, and the foreign sector
• income = expenditure = output
A Simple 2-Sector ModelWages, Rent, Dividends
Labour
Goods & Services
Consumption Spending
A more complex model…
Note: injections & withdrawals can happen at any stage in the model
Wealth vs. Income
• Wealth: the sum of all assets in an economy (a stock concept)
• Income: the money generated from that wealth (a flow concept)
• Greater wealth leads to greater income (which can explain why differences between rich & poor can widen without gov’t intervention)
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