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Necessary cookies are absolutely essential for the website to function properly. Government welfare benefits, spending on infrastructure.Ĭategories economics Tags diagrams, economic principles Money coming from abroad to buy domestically produced goods. Money invested by firms into purchasing capital stock. Spending that puts money into the circular flow of income. Injections (J) into Circular Flow of Income Taxes (T) (money collected by government, e.g.Imports (M) (money sent abroad to buy foreign goods).Savings (S) (money not used to finance consumption, e.g.Withdrawals are items that take money out of the circular flow. Withdrawals (W) into Circular Flow of Income Therefore, there is a flow of money between one country and the rest of the world. The government taxes firms and consumers, and then spend money, e.g. In the real world, it is more complicated. This represents a simple economic model it is a closed economy without any government intervention. Therefore, the spending goes back to firms. For example, with wages from work, households can then buy goods produced by firms.
Total amount spent on goods and services. Therefore income flows from firms to households. For example, firms have to pay workers to produce the output. (profit, dividends, income, wages, rent) This is the total income received by people in the economy. The total value of output produced by firms. This circular flow of income also shows the three different ways that National Income is calculated. Individuals who consume goods and receive wages from firms. Companies who pay wages to workers and produce output. In the very basic model, we have two principal components of the economy: The Circular flow of income diagram models what happens in a very basic economy.
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