gcse economics - the big picture: circular flow of income

This shows how money circulates in a simple economy.

Initially households spend money on goods and services produced by firms. Households get the money to buy these goods and services by supplying the factors of production (land, labour, capital and enterprise).

ADDING TO THE CIRCULAR FLOW AND THE VALUE OF THE ECONOMY

- Businesses may invest money into new equipment or new factories. This allows extra production to take place.
- The Government may spend £100 mn on a roadbuilding project. This creates economic activity
- An export is a sale of a good or service to a foreigner. This brings money into the economy.

LOWERING THE CIRCULAR FLOW AND THE ECONOMIC ACTIVITY

Savings mean that people are not spending money on goods and services
Taxes are taken out of peoples and businesses incomes. This money cannot be spent on goods and services.
Imports are purchases from abroad. The money leaves the country

ACTION

a. Try to draw the full circular flow without looking at the diagram

 SMART THINKING

b. Multipler: If there is an addition of £3million (govt spending or investment) into the circular flow it may create £9 million of economic activity. This is a multiplier of 3. How does this happen?