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Macroeconomics 1 – The domestic economy

Understanding national income:

the circular flow of funds model

2.1 Definitions/terminology/symbols

The economy can be measured in 3 ways, each of which gives the same answer:

 National product Value of finished goods and services

 National income (Y) Rewards earned by the factors of production

 National expenditure (E) Money spent purchasing the national product

Other key definitions include:

 Consumption (C) Goods produced and sold to consumers

 Savings (S) Income not spent

 Investment (I) Production of, or expenditure on, non-
consumption goods. Carried out by firms

 Injections (J) Expenditure on domestic output not originating
from consumers - e.g. Investment

 Withdrawals/Leakages (W) Income not spent on domestic output - e.g.
Imports

Other key symbols

 T = Taxation

 G = Government expenditure

 X = Exports

 M = Imports

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