The Income Machine | The Economics Tutor

Circular flow of income and spending Withdrawals (S, T, M) Injections (I, G, X) Thicker pipe = bigger flow

National income (Y)

£500bn

Steady

There are only two sectors: households and firms. Households spend all their income on firms' output, and firms pay all their revenue back out as wages, rent, interest and profit.

Nothing leaves the flow and nothing is added to it, so national income stays at £500bn. Income = output = expenditure.

The real economy isn't like this: households save, pay taxes and buy imports. Open the economy to see what happens.

Withdrawals

Income that is not passed back to UK firms as spending.

W = S + T + M

Injections

Spending on UK output that does not come from households' consumption.

J = I + G + X

Equilibrium

If J > W income rises. If J < W income falls. It settles where they are equal.

Y settles where J = W

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Streak0

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Time90

Leak or pump?

You have 90 seconds to sort 24 real-world events. Is each one a withdrawal from the circular flow, an injection into it, or neither? Watch out for the classic exam traps.

Your feedback appears here after each answer.

The injection

The government spends £10bn building new hospitals. That £10bn becomes income for builders and suppliers. What do they do with it?

Round0

Rise in income£0.0bn

Withdrawn so far£0.0bn

Spent on UK output (next round) Saved Taxed Imported