New Way Analyzing National Income, Circular Flow

The expenditure method: the total amount of domestic spending by consumers, firms, government and foreigners. National income accounting is the process whereby countries attempt to measure these flows. The result of each the three methods is the gross domestic product. An examination of the national income accounts gives an insight into the economy. In reality the households do not spend all their current income. Some is saved. This represents a leakage from the circular flow. In addition to the consumer spending, firms also carry out investment spending. This is an injection to the circular flow of income Biz/auricular flow of income, as it does not originate from consumers current income.

The Virtual Developing Country is a case study of Zambia. There are a series of field trips available looking at different circular flow of incoming issues connected with economic development. This trip is the Copper Tour and this page looks at the Circular Flow of Income. The circular flow of income is a model of the economy showing flows of goods and services and sectors of production between firms and households. In the absence of government and international trade this model shows that households provide the sectors of production for firms who produce goods and services. In return the sectors of production receive sector payments, such as wages, which in turn are spent on the output of firms. This basic flow is shown in the diagram below.

In the real world the government and international trade sectors must also be included. Economic systems are in reality three sector open economies. Consequently there will be additional leakages and injections. Government spending will be injected into the circular flow and taxation will leak from it. Export flows will be injected and imports flows leaked. A full circular flow with leakages and injections is shown below. This model of the economy demonstrates that economic activity is a flow. In actual ct it can be considered two flows, one of goods and services and a flow of money. The size of these flows is an indicator of the amount of economic activity. The circular nature of the flows means that there will be a number of different ways of measuring the size of the flow. Economists maintain that there are three possible ways of measuring this flow with each way looking at a different part of the circular flow of income. It provides data which governments and external agencies can use in a variety of different ways.  As a leading global manufacturer of crushing and milling equipment, we offer advanced, rational solutions for any size-reduction requirements, including quarry, aggregate, grinding production and complete stone crushing station. We also supply individual and as well as spare parts of them.