1、Schneider Electric1-ISC Marketing-1/2010Diagram of circular flow of incomeDiagram of circular flow of incomeenterpriseSchneider Electric2-ISC Marketing-1/2010Injections and withdrawsInjections and withdrawsKnow definitions,examples,and influence definitions,examples,and influence on the circular flo
2、w of incomeon the circular flow of income.There are 3 sets of injections and withdrawals which can alter the circular flow of income in an economy.Injection(J)is money entering the flowInjection(J)is money entering the flow.Injections include Investment,government spending and Exports.Withdrawal(W)i
3、s money leaving the flowWithdrawal(W)is money leaving the flow.Withdrawals include saving,taxation and imports.Schneider Electric3-ISC Marketing-1/2010InvestmentInvestmentIn economics,investment is buying and producing capital goods which are not consumed but are to be used for future production.Exa
4、mples include tangibles(such as building a railroad or factory)and intangibles(such as a year of schooling or on-the-job training),etc.More investment means that more production and more employment,and more income circulate and thus economic activity is increased.Schneider Electric4-ISC Marketing-1/
5、2010Saving Saving In economics,personal saving has been defined as personal disposable income minus personal consumption expenditure.For example,households deposit money into banks or other financial institutions,or just retain money in treasuries.If a country saves too much of its income this is wi
6、thdrawn from the circular flow and the flow will decrease.This means that less income circulates and economic activity is reduced.Schneider Electric5-ISC Marketing-1/2010Government Spending(G)and Taxation Government Spending(G)and Taxation(T)(T)Government taxesGovernment taxes both the household and
7、 business,so that taxes(T)are withdraw.Example:direct tax(income tax)and indirect tax(sales taxes).In detail,value added tax(VAT),Capital gains tax,Corporation tax,Environment Affecting Tax,Inheritance tax,Property tax,etc.Increasing taxes will decrease disposable income,thus less income circulates
8、and economic activity is reduced.The government purchases goods and services from the business,and gives transfer payments,so that government government spending(G)spending(G)is injection.(G)includes:investment directly into the economy in the form of grants,business allowances,investment in roads,h
9、ospitals,housing,investment in nationalised industries,and the Welfare State,pensions,unemployment benefits and other transfer payments(TP).Increasing investment and spending by government will increase employment and production,thus more income circulates and economic activity will be increased.Sch
10、neider Electric6-ISC Marketing-1/2010Exports(E)and Imports(M)Exports(E)and Imports(M)Exports:Exports:goods and services are produced in one country and sold abroad.The payment for them will return to the firms in this country.Thus,it is an injection.ExampleExample:This increases the circular flow an
11、d creates more economic activity in the economy.Imports:Imports:goods and services which are bought from other countries and constitute a withdraw from the circular flow of income and enter the flow of income of another country.ExampleExample:This decreases the circular flow and causes less economic
12、 activity in the economy.Schneider Electric7-ISC Marketing-1/2010Difficulties of measuring National Difficulties of measuring National IncomeIncome 1.Arbitrary definition of production(what should and should not be measured).2.Value of service rendered by consumer durable goods.3.Inadequate Informat
13、ion.4.Danger of double counting.5.Problems in making comparisons over time and between countries.Schneider Electric8-ISC Marketing-1/2010Arbitrary exclusionArbitrary exclusionA number of items are excluded in the measurement of NI,even though they often do represent real productive effort.Undergroun
14、d activitiesIllegal activitiesUnreported(but legal)activitiesNon-market activitiesServices of homemakersDIY productionVolunteer servicesSchneider Electric9-ISC Marketing-1/2010Other difficulties of measuring NIOther difficulties of measuring NI“Notional rent”of owner-occupied houses is counted in NI
15、 like real rent of property for letting,and hence prevents GDP falling.There is danger of double counting such as taxes,transfer payments,stock appreciation,and input by others.Inadequate information.The sources from which data are obtained were not specifically designed to provide information for N
16、I calculations.In addition,capital consumption of fixed assets is the major problem,because there is no accurate figure for realreal depreciation.Problems in making comparisons over time and between countries.Schneider Electric10-ISC Marketing-1/2010How to compare growth rates of different How to co
17、mpare growth rates of different countriescountriesNI growth rate(%)country 200020012002A3.52.61.8B 2.54.53.1C1.92.53.2Schneider Electric11-ISC Marketing-1/2010Weaknesses of NI as indication of standard Weaknesses of NI as indication of standard of livingof livingNI is the nearest indication of welfa
18、re.But NI cannot be accepted solely on its face value.The following qualifications must be made:The rise in general level of price:inflation.Population level changes.The proportion of consumer and producer goods may change.Change in NI may be due to surplus of exports over imports.Unfair distributio
19、n of the wealth.Only a small minority of wealthy people consume the extra goods.Paid services may become more.Environmental problems.Schneider Electric12-ISC Marketing-1/2010To compare Standards of Living of different To compare Standards of Living of different countriescountries When used for inter
20、national comparison,GNP statistics are subject to qualifications in addition to those mentioned above.Exchange rates may not reflect accurately the internal purchasing power of currencies.Tastes and needs vary between countries.The proportion of GNP spent on defense and social services varies.Countr
21、ies vary in average working week,proportion of women workers,number of jobs done by themselves,accuracy of tax returns.Schneider Electric13-ISC Marketing-1/2010MultiplierMultiplierAny change in the level of injections or withdrawals will bring about a change in the level of National Income.The chang
22、e in National Income will be relatively greater than the initial relatively greater than the initial changechange.This is known as the“Multiplier”effect.Another definition:the additional shiftsadditional shifts in aggregate demand that result when expansionary fiscal policy increases income and ther
23、eby increases consumer spending.Schneider Electric14-ISC Marketing-1/2010Marginal propensity to consume and Marginal propensity to consume and savesaveMarginal Propensity to Consume(MPC):Marginal Propensity to Consume(MPC):ratio of the change in consumption to the corresponding change in income.Marg
24、inal propensity to save(MPS):Marginal propensity to save(MPS):ratio of the change in saving to corresponding change in income.Schneider Electric15-ISC Marketing-1/2010Formulae of MPC and MPSFormulae of MPC and MPS incomeinchangenconsumptioinchangeMPC For example,if income rose from 350 to 400 and co
25、nsumption rose by 10:20%5010MPC incomeinchangesavingsinchangeMPS If income rises from 350 to 400,consumption rose by 10 so savings must increase by 40:MPS=80%5040 Schneider Electric16-ISC Marketing-1/2010Multiplier formulaMultiplier formula 1 1 M ultiplier(k)=M PS or 1-M PC A change in an injection
26、can have a multiplier effect.E.g:MPC=0.6 and the MPS=0.4,and there is an increase in investment of 1 million,the value of the multiplier will be:1 million x(1 0.4)=2.5 million,meaning that 1 million investment increase will increase national income by 2.5 times.Schneider Electric17-ISC Marketing-1/2
27、010An example for multiplier effectAn example for multiplier effect Initial round Assuming MPS=0.5,K=2$10 million 2nd round 10 x 0.5=5.0 3rd round 5 x 0.5=2.50 4th round 2.5 x 0.5=1.25 5th round 1.25 x 0.5=0.625 6th round 0.625 x 0.5=0.3125 Total$20 million (investment)(Ultimate injection)Schneider
28、Electric18-ISC Marketing-1/2010Explanation of multiplier effectExplanation of multiplier effect1.Income and employment is generated,output rises,some of the money disappears as a leakage.2.The remaining money goes round the system again,generating more income,employment and output.Again,some more mo
29、ney leaks out.3.This process continues with income and employment being generated and output increasing.The amounts going round the system get smaller and smaller.Schneider Electric19-ISC Marketing-1/2010Graph Graph of of multiplier effectsmultiplier effectsSchneider Electric20-ISC Marketing-1/2010E
30、xplain nominal and real growth rateExplain nominal and real growth rateNI growth rate(%)country 200020012002A3.52.61.8B 2.54.53.1C1.92.53.2Schneider Electric21-ISC Marketing-1/2010How to explain nominal and real NIHow to explain nominal and real NINominal NINominal NI is the value of NI in terms of
31、price prevailing at the time of measurement.Real NI Real NI is the value of NI measured in terms of prices prevailing in a given base year.Growth rates in the table are nominal growth rates.We have to know real growth rate to tell whether which countrys NI really grew.For getting real growth rate,we
32、 need to know inflation rate or CPI(RPI in UK).If inflation rate is bigger than the nominal growth rate,then the real NI did not increase.Schneider Electric22-ISC Marketing-1/2010Nominal and real NINominal and real NIInflation increases the money value of national income but does not provide us with
33、 any more goods to consume.Real National IncomeNational Income is found by applying the equation:Real National Income=Standard of Living=100Index Price Retail Income NationalMonetary population Income National RealSchneider Electric23-ISC Marketing-1/2010New wordsNew wordsParticipant,complex,involve,sampling,substantially
