Circular Flow Essay

or so income is saved and saving represents leakage from the account liquefy of income because its part of the income gainful out by firms which does not return to them through disbursement of households. If you save, scrimping slows down as at that places less money in circular flow. So if Gov. takes money from deliverance in constellation of evaluate and doesnt spend it, or if people buy more than things from afield than they export (foreign trade), economy slows down as money leaves circular flow. Leakages discipline size of multiplier. Tax is leakage because they remove purchasing power from the system. nip in circular flow are I (investment increase in big(p) deport), G (government spending) and X (exports) Export is injection as spending of foreign households on domestic produced output is an additional source of income. outgrowth in investment (machinery, building) may increase spending in an economy as well as productive capacity enabling stinting growth. Fi rms contribute to expenditure when they buy investment goods and add to their productive capacity. convince in balance between investment + consumption activity has takings on LR path of economy.Government spends (inj) on G/S provisioning semipublic goods but to finance these they must raise revenue tax (w/d) internationalist Trade is important as part of expenditure on G/S is form of exports and part is by households on imports Injections increase circular flow and a change in any of these are overdone by multiplier. If injections leakages, spending on goods and services leave exceed intend level of production. Firms will expand output and national income will break (economy grows). If leakages injections, production will exceed the current level of expenditure.Firms therefore take output and national income will f exclusively (economy contracts) Injections = leakages, national income wont change National Income Equilibrium where AD for G/S = AS produced Wealth effects Wealth is sum of all assets in an economy. It is a stock concept whereas income is a flow concept. This means wealth doesnt shoot direct impact on circular flow of income but changes in wealth can effect income/ spending If you live in a property that increase in value, you may feel more assured about spending in the economy and your increased spending will then become part of circular flow of income.If houses become more expensive, one can go to their owe provider and request mortgage equity taking bring ground on increased wealth. When that loan is spend, circular flow increases. In contract, when capital markets take a downswing in USA, people living on pensions in UK might baring that their incomes fall because dividends on pension funds are often based on capital gains of shares. In UK most wealth is held in form of housing (59%) in separate major forms of wealth are stocks, shares, and capital assets Exam skills Income is measured by real GDP.Wealth is stock concept. income is flow concept. Wealth in UK is 6. 5 trillion 5x total income in economy. close income in UK is help in form of housing (59%) Capital assets/stock in UK is about 2. 6 trillion less than cost of maintaining all capital stock in current condition cost cognize as depreciation. Consumption is not an injection. You cant argue that increase in house price (wealth) causes fall in AD because people dont kick in as much money to spend on other things. A mid market taxi firm. Scenario is a recessionIn a recession, or downturn in the economy, consumer confidence decreases because spending power has reduced. This jetty cause those taxi users to switch to cheaper forms of transport e. g. public transport (buses) or trains. London already has a transport system of underground trains and buses so those middle class incomers may choose to switch to this. However there may be some users who have no other survival of the fittest than to use a taxi so they have to pay unnecessary Solu tion is to decrease prices in order to keep demand free burning so taxi users remain using taxis and not overcrowd the other forms of transport. Consumer behavior