Circular Flow of Income• Y = Income

• C = Consumption Expenditure

• S = Savings

• I = Investment

• T = Taxation

• G = Government Expenditure

• M = Imports

• X = Exports

1

Circular Flow - Simple

2

Consumers Producers

Resources

Goods and Services

Consumption Expenditure

Income

Circular Flow - Simple• Assumptions:

– Only two sectors - Consumers and Producers– All production is sold to the consumers– Producers provide all the Goods and Services– Consumers spend all their Income on goods an

services– No government and no overseas sectors– Consumers are the owners of productive resource -

land, labour, capital and enterprise

3

Circular Flow - Savings and Investment

4

Y

C

Financial systemS I

Consumers Producers

Circular Flow - Savings and Investment

• S = I : Economy will not expand.

• S > I : Economy contract.

• S < I : Economy expand.

5

Circular Flow - Government Sector

6

Y

GOVERNMENTTAXATION

Financial systemS I

C

SPENDINGSUBSIDIES

Consumers Producers

Circular Flow - Government Sector

•T = G : Economy will not expand or contract

•T > G : Economy will contract

•T < G : Economy will expand

7

Circular Flow - Four Sectors

8

Y

Financial systemS I

OVERSEAS SECTOR

GOVERNMENTT

M

G

X

LE

AK

AG

ES

INJE

CT

ION

S

CConsumers Producers

Circular Flow - Four Sectors

•Equilibrium is achieved when

Total Leakage = Total Injections:

•S + T + M = I + G + X

9