Starter Qs
1. She'll only pay pennies and dimes for
a kiss, but her whole soul for a wish.
The weird economics of what popular
song that anagrams to MY ABLE
CAMEL?
2. What famous drink was introduced as
"Brad's Drink" in New Bern, North
Carolina in 1893 at a drugstore? The
product was renamed five years later
after the Greek word for "digestion."
3. Developed by George Lerner in 1949
and manufactured by Hasbro in 1952,
what children's toy was the first ever
to be advertised on television? it was
the first campaign to explicitly market
towards children.
Answers
1. She'll only pay pennies and dimes for a kiss, but
her whole soul for a wish. The weird economics of
what popular song that anagrams to MY ABLE
CAMEL?
2. What famous drink was introduced as "Brad's
1. Call Me
Maybe
Drink" in New Bern, North Carolina in 1893 at a
drugstore? The product was renamed five years
later after the Greek word for "digestion."
3. Developed by George Lerner in 1949 and
manufactured by Hasbro in 1952, what children's
toy was the first ever to be advertised on
2. Pepsi Cola
television? it was the first campaign to explicitly
market towards children.
3. Mr. Potato
What is national income?
National income is the value of the output,
expenditure or income of an economy over a period
of time
How do we measure national
income?
There are three methods to measure national income:
1) The income method – adds up all the incomes received
by labour and the factors of production when producing
goods and services (Rent + Wages + Interest + Profit)
2) The output method – adds up all the output produced in
all sectors of the economy including manufacturing,
financial services, transport, leisure, agriculture, etc
3) The expenditure method – adds up all the spending in
the economy by households and firms on new (and final)
goods and services
𝑌 ≡ 𝑂≡ 𝐸
Vietnam Quarterly GDP Growth
Rate
The main components of the macro-
economy
Households and Firms
– National income is generated by the activities of the two most
important parts of an economy, households and firms, as
they engage in mutually beneficial exchange
The role of households is to supply firms with factors of
production
The role of firms is to provide private goods and
services to households in the economy as well as other
firms
Building up the circular flow of income
Circular flow of income – a model of the economy which
shows the flow of goods, services, and factors and their
payments around the economy
Household
s
Goods and Labour &
services Factors of
Productio
n
Income Expenditu
(Y) re
(E)
Firms
Building up the circular flow of income
Adding banks into the circular flow – institutions where
households can deposit savings and firms can borrow
money for further investment
Household
s Saving
Goods & Labour &
services Factors of
Productio Banks
n
Expenditu
Income re
(Y)
(E) Investmen
t
Firms
Building up the circular flow of income
Adding the government into the circular flow – raise
taxes from households and firms, spend money in the
economy, and provide public services.
This is a modern “closed economy”
Household
Governme s Saving
nt
Tax
Spending
Goods and Labour &
Governme services Factors of
Productio Banks
nt n
Income Expenditu
(Y) re
Tax
(E) Investmen
Government
t
Firms
Spending
Building up the circular flow of income
Adding the rest of the world into the circular flow – exports and
imports from foreign countries
Household Open Economy
Governme s Saving
nt
Tax
Spending
Goods and Labour &
Governme services Factors of
Productio Banks
nt nExpenditu
Income re
(Y)
Tax (E)
Investmen
Government
t
Firms
Spending
Exports Foreign Imports
Countries
How can we interpret the circular flow of
income
The circular flow shows how that the value of the
economy can be determined three ways:
Income: The sum of all money paid to households
(Rent + Wages + Interest + Profit)
Output: The value of all the goods & services produced
Expenditure: The sum of all spending on goods and services
by households
Injections & Withdrawals
Injections? Withdrawals (or Leakages)?
Money entering the circular Money leaving the circular
flow of income (Y) flow of income (Y)
Investment (I) Savings (S)
Government Spending (G) Taxation (T)
Exports (X) Imports (M)
I+G+ S+T+
Household
Governme s Saving
nt
Tax
Spending
Goods and Labour &
Governme services Factors of
Productio Banks
nt nExpenditu
Income re
(Y)
Tax (E)
Investmen
Government
t
Firms
Spending
Injections Foreign Withdrawals
Exports Imports
I+G+ Countries
S+T+
National Income Equilibrium
National income is in equilibrium when the rate of
injections = the rate of withdrawals within an economy
What do you think the formula is for this equilibrium?
I+G+X=S+T+M
What happens if I + G + X > S + T + M ?
NET injection into circular flow, national income rises
What happens if I + G + X < S + T + M ?
NET withdrawal from circular flow, national income falls
Question
In an economy, savings are £10 billion, investment is £12
billion, taxes are £8 billion, imports are £13 billion,
government spending is £6 billion, and exports are £11 billion.
Is there a NET injection or NET withdrawal? Show Working.
Total injections = 12 + 6 + 11 = £29 billion
Total withdrawals = 10 + 8 + 13 = £31 billion
Withdrawals > Injections
Therefore, NET withdrawal is £2 billion
Activity: Read the scenarios and decide whether they will lead
to an injection or withdrawal to the circular flow of income
and the likely effect on national income
When making your decision, think about the MAIN effect on “I + G + X = S + T + M”, just pick one for now.
No Scenario Change in injection or Likely effect on national income Why have you made your choice?
withdrawal (I,G,X OR S,T,M)
1 A fall in business confidence - Injection - Withdrawal - Both Expansion / Contraction
among UK manufacturing
firms
2 The government announces - Injection - Withdrawal - Both Expansion / Contraction
an aboveinflation pay rise for
nurses working in the NHS
3 A survey shows that - Injection - Withdrawal - Both Expansion / Contraction
consumers expect to see
a sizeable rise in
unemployment over the next
twelve months
4 The annual rate of economic - Injection - Withdrawal - Both Expansion / Contraction
growth in the United States
increases following a fall in US
interest rates
5 The government decides to - Injection - Withdrawal - Both Expansion / Contraction
increase the UK roadbuilding
programme by £600m
6 Ahead of a general election, - Injection - Withdrawal - Both Expansion / Contraction
the government announces a
reduction in the basic rate of
income tax from 22% to 20%
Activity: Read the scenarios and decide whether they will lead
to an injection or withdrawal to the circular flow of income
and the likely effect on national income
When making your decision, think about the MAIN effect on “I + G + X = S + T + M”, just pick one for now.
No Scenario Change in injection or Likely effect on national income Why have you made your choice?
withdrawal (I,G,X OR S,T,M)
1 A fall in business confidence - Injection - Withdrawal - Both Expansion / Contraction Reduction in investment.
among UK manufacturing
firms
2 The government announces - Injection - Withdrawal - Both Expansion / Contraction Increase Government spending
an above inflation pay rise for
nurses working in the NHS
3 A survey shows that - Injection - Withdrawal - Both Expansion / Contraction Increased saving
consumers expect to see a
sizeable rise in
unemployment over the next
twelve months
4 The annual rate of economic - Injection - Withdrawal - Both Expansion / Contraction More investment
growth in the United States
increases following a fall in US
interest rates
5 The government decides to - Injection - Withdrawal - Both Expansion / Contraction Increased Government Spending
increase the UK roadbuilding
programme by £600m
6 Ahead of a general election, - Injection - Withdrawal - Both Expansion / Contraction Reduction in Taxes
the government announces a
reduction in the basic rate of
income tax from 22% to 20%
Macroeconomic equilibrium Activity: Fill in the missing words
equilibrium
For an economy to be in _________________________, injections must be
equal
__________________ to withdrawals. Injections into the circular flow are made up of
investment, ____________________
govt spending and __________________,
exports while withdrawals
comprise of savings, ________________________ and
taxes imports
____________________. If
injections do not equal withdrawals, then the economy is said to be in
disequilibrium. If withdrawals are greater than injections, the economy will suffer
expenditure
declining incomes, output and ____________________. Eventually, lower incomes
will reduce the levels of taxation and saving, causing leakages to shrink until they
equal injections. If injections are greater than withdrawals, the economy will be
expanding (economic growth). greater
When the economy is growing (injections are
___________________
more than withdrawals), households and firms will pay
________________ tax, and are also likely to save more. Households are also likely
overseas
to buy more goods from ___________________. This will cause the value of leakages
to increase, up to the point where they are equal to injections. At this point the
economy has returned to equilibrium.
Missing words: expenditure, imports, more, govt spending, equal, greater,
Can you create the circular flow of income
from memory? (no cheating)
Household
Governme s Saving
nt
Tax
Spending
Goods and Labour &
Governme services Factors of
Productio Banks
nt nExpenditu
Income re
(Y)
Tax (E)
Investmen
Government
t
Firms
Spending
Injections Foreign Withdrawals
Exports Imports
I+G+ Countries
S+T+
Plenary
What do these letters stand for?
O/E/Y/S/I/X/G/T/M
What happens to national income if (ceteris paribus).....
a) The value of UK exports are rising faster than imports
INCREASE
b) The government increases taxes without increasing DECREASE
spending
c) Consumers are keeping more of their income DECREASE
under their
mattresses rather than depositing it in the bank
Plenary
A
Plenary
D
Plenary
B
Plenary
INJECTION =
83BN
LEAKAGE=
B
78BN
Extras
EXT and review: What about bonds, gilts,
gross capital flows? Leakage or Injection?
https://www.youtube.com/watch?
v=mN5HPJYJzus
