Circular Flow of Income

Topics: Economics, Tax, Investment Pages: 2 (566 words) Published: May 9, 2011
Q1. Withdrawals
Goods and services


Q1.The circular flow of income is to show flows of goods and services and factors of production between firms and households. It used to measure the level of income and output in the economy .

Households provide resources which aid the production process of business firms. Resources such as labour, land and capital are used by the business firms in return for payment this generates a flow of income to the households in the form of wages, rent, interest and profit . Firms in return make using the factors of productions goods and services which are sold to the households. Households give back payment for the goods and services these are expenditures. Expenditure of households becomes income for firms. The firms then spend this income on factors of production such as labour, capital and raw materials, "transferring" their income to the production factor owners. The production factor owners then spend this income on goods and services provided by the business firms which leads to a circular flow of income.

The income and spending of the circular flow of income are not equal this is because of injections and withdraws from the economy. Injections provide finance into the economy whilst withdrawals is money taken out of the economy. If withdrawals are bigger than injections the country would be facing a deficit and negative economic growth. If withdrawals are less than injections then a country would be facing a...
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