The circular flow of income in an open economy, Macroeconomics

Assignment Help:

 

The circular flow of income in an open economy 

An open economy is one in which international trade exists. Assume also that there is government spending and taxation.

Thus households need not consume all of their income. Some may be saved (S), spent on imports (M), or taxed (T). So the savings (S) and imports (M) and taxes imposed (T) are known as "withdrawals" (W) or "leakages" from the actual flow. An increase in withdrawals (W) will reduce the level of output and income (Y).

However, Y will be added to investment (I), government spending (G) and money spent by foreigners on exports (X). These are known as "injections" (J).In an open economy the size of Y is determined by the size of AD, which is determined by C + I + G + X. 

 

 

1979_The circular flow of income in an open economy.png

 

 

 

 

 

Over a period of time there are withdrawals (W) from the income flow. If individuals save, then the income is taken out of the circular flow. If an economy's income is Rs.1,000 and it saves Rs.200, then only Rs.800 is passed on as expenditure. Other withdrawals are taxes and imports. The latter represent a loss of income from the domestic economy to some overseas economy.

Alongside withdrawals there are also injections (J) into the flow of income. These are in the form of investment, government spending and exports, savings withdrawn and used to finance investment, either directly through the purchase of capital goods or indirectly via financial institutions such as banks. Thus, the original withdrawal or savings ends up as an injection elsewhere in the system. Taxes end up as government spending on goods and services. Exports are financed from spending made by other countries. This spending enters into the circular flow as an injection of income.

In this economy

                 Y = AD

Therefore, Y = C + I + G + X

              Y= C + J

Where J equals injections i.e. I, G and X.

For equilibrium we require all withdrawals to equal all injections i.e. W = J. If injections are greater than withdrawals then the level of national income (i.e. total incomes) will rise, and vice versa. 

 


Related Discussions:- The circular flow of income in an open economy

How do you explain gni per capita, To determine of the wealth is earned by ...

To determine of the wealth is earned by nations by economic activates all around the globe. Gross National Income comprises the total value of goods and services formed within a

Describe type of protection, A new industry develops, and our government wa...

A new industry develops, and our government wants to protect it from foreign competition. Which one of the following arguments would appropriately describe this type of protection?

Liberalisation and changing sources of fdi, Liberalisation and Changing Sou...

Liberalisation and Changing Sources of FDI: European countries  had been major sources of FDI inflows  to India until 1990. However, their relative importance declined in the

Compute the npv-the irr the mirr, Suppose a company is considering two inde...

Suppose a company is considering two independent projects, Project A and Project B.  The cash outlay for Project A is $14,000. The cash outlay for Project B is $20,000. The company

Porter''s model affect, How do the five competitive forces in Porter's mode...

How do the five competitive forces in Porter's model affect the profitability of the overall industry? For example, in what way might weak forces increase industry profits, and in

GLOBAL LOSSES, SUPPOSE MR.CHANSA DEPOSIT HIS MONEY INTO BANK-B,HOW WOULD TH...

SUPPOSE MR.CHANSA DEPOSIT HIS MONEY INTO BANK-B,HOW WOULD THE T-BALANCE SHEET LOOK LIKE FOR BANK-B

What are UN millennium development goals, What are UN Millennium Developmen...

What are UN Millennium Development Goals? The UN Millennium Development Goals (MDGs): These are a set of objectives shared through the IMF, the OECD and the World Bank (WB)

Estimate paper by stock and watson in a bayesian manner, estimate paper by ...

estimate paper by stock and watson in a bayesian manner

Market supply of labour, Use a graphical illustration to describe briefly w...

Use a graphical illustration to describe briefly what the influence of each of the following would be on the market supply of labor:(a) an increase in immigration (b) more women en

How to find nominal gdp in the current year, Consider an economy that produ...

Consider an economy that produces only three types of fruit: apples, oranges & bananas. In the base year the production & price data are as follows: Fruit

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd