Circular Flow of Income & Output

Income Flow this is the inflows and outflows of income as revenues and expenses, caused
by the operation of a business and reflected in its income statement. The
income flow is circular.
Output Flow
Expenditure Flow
Stock Variable a variable, which is measurable at a particular point of time; has no time
dimension (length of time)
Inflow injections of income originating from outside the circular flow. It takes form of
investments, government expenditures and proceeds from exports to the rest of
the world.
Outflow that part of income that leaks out of the circular flow. Examples are Savings,
taxes and imports are withdrawals from the flow.
Resources - a service or other asset used to produce goods and services that meet human
needs and wants
Income Reward/ Factor Payments are the income people receive for supplying the factors
of production: land, labor, or capital. A wage, interest,
rent, and profit payment for the services of scarce
resources, or the factors of production, in return for
productive services.
Flow Variable an economic magnitude describing behavior that occurs over time and is
therefore meaningful only relative to the unit of time. It has time
dimension. National income is a flow.

National Income Accounts

Consumption Goods those which directly satisfy human wants and are used over the
income period (the time between collections).
Investment Goods that used to produce other goods and services; also said that they are
additions to the nations capital stock, which represents the productive
capacity of the economy. Three types: (a) new construction, durable
equipment and breeding stock and orchard development, all for
production purposes, (b) new houses, (c) changes in stocks of goods
(inventories) of business firms.
Government Expenditure Spending by the government sector including both the purchase
of final goods and services, or gross domestic product, and
transfer payments. Government expenditures are used by the
government sector to undertake key functions, such as national
defense and education. These expenditures are financed with a
combination of taxes and borrowing.
Net Exports The value of a country's total exports minus the value of its total imports. It is
used to calculate a country's aggregate expenditures, or GDP, in an open
economy. Net exports the difference between a country's total value of
exports and total value of imports. Depending on whether a country imports
more goods or exports more goods, net exports can be a positive or negative
value.
National Income the sum total of all the payments to households for factors of production
used, government from capital and undistributed income of corporations.
Gross National Product the sum of all the market values of all the final goods and services
produced in a given period.
Income Approach to GNP looks at who contributed to production and how they were
rewarded.
Expenditure Approach to GNP looks at how the goods and services were used. Whatever is
produced by the economy is either used up (consumed) or
not.
Deflation when the overall price level decreases so that inflation rates become negative;
opposite of inflation. A general decline in prices, often caused by a reduction in
the supply of money or credit. Caused also by a decrease in government,
personal or investment spending. The opposite of inflation, deflation has the side
effect of increased unemployment since there is a lower level of demand in the
economy, which can lead to an economic depression.
Consumer Price Index a measure of the changes in prices of consumer goods and
services.
Real GNP computes the value of production using the prices of a fixed year so the
movements in real GNP reflect only the changes in the quantity of goods and
services produced.
Current GNP measures the value of production using the prices of the current year. The
total value of final goods and services produced during that year. But if prices
are changing then GNP at current prices reflects that movements of both
quantities produced and their prices.
Balance of Trade the difference between a countrys imports and its exports; the largest
component of a countrys balance of payments. This is the difference
between exports and imports.
Balance of Payments A statement that summarizes an economys transactions with the
rest of the world for a specified time period. The balance of
payments, also known as balance of international payments,
encompasses all transactions between a countrys residents and its
nonresidents involving goods, services and income; financial claims
on and liabilities to the rest of the world; and transfers such as gifts.
The balance of payments classifies these transactions in two
accounts the current account and the capital account.

Determination of National Income

Average Propensity to Consume refers to the percentage of income that is spent on goods
and services rather than on savings. One can determine
the percentage of income spent by dividing the average
household consumption (what is spent) by the average
household income (what is earned). (the measure that
relates total consumption expenditure as a percentage of
total income.)
Marginal Propensity to Consume An important concept which can be derived from the
consumption function. The proportion of an aggregate
raise in pay that a consumer spends on the consumption
of goods and services, as opposed to saving it.
(expresses the ratio between change in the level of
consumption expenditure that accompanies a change in
the level of income.)
Full Employment Equilibrium a situation in which all available labor resources are being
used in the most economically efficient way; embodies the
highest amount of skilled and unskilled labor that could be
employed within an economy at any given time.
Multiplier a factor that quantifies the change in total income as compared to the injection
of capital deposits or investments which originally fueled the growth. It is usually
 used as a measurement of the effects of government spending on income, and it
can be calculated as one divided by the marginal propensity to save.
Consumption the use of goods and services by households. the utilization of economic
goods to satisfy needs. The process in which the substance of a thing is
completely used up, or incorporated or transformed into something else.
Consumption Function a mathematical formula laid out by famed economist John Maynard
Keynes. This formula is used to express consumer spending. (At
every level of income (Y), there is a corresponding level of
consumption expenditures, consistent with that level of income in
the economy.
Effective Demand the same as aggregate demand, which is the total demand of all sectors
in the economy for goods and services.
Savings is income not spent. It is that part of income not consumed nor paid to the
government.
Investment spending for goods used for future rather than current consumption. These
are goods used to produce other goods. This also a process of increasing the
stock of capital the tools used for production.
Productivity An economic measure of output per unit of input. A measure of the efficiency
of a person, machine, factory, system, etc., in converting inputs into useful
outputs.
National Income -