Everything here is on an annual basis. Last accessed 6th April 2011. So a couple of ways to think about it. It sells him goods and services. So the whole point of this video and this is, obviously, a very artificial case where we're dealing with an island with only one person and he's essentially renting out his own labor by using this firm as some type of vehicle. Likewise, sometimes there is extra spending in the economy,from investment, government expenditure and spending on exports, which will be added to the circular flow of income. In other words, we have expenditure- side transaction.
The labor, the land, the capital, and if we wanna throw it in, the entrepreneurship, it's all loaned by households and all goods and services are produced by firms. So he's getting food and shelter and in exchange for the food and the shelter, he's going to pay the firm. So this is expenses and here we're going to be thinking in terms of economic profit because we're really just thinking about how much money is coming out of this firm, out of this business. And they essentially rent them out to firms to produce all the goods and services. Also it shows in the diagram how the government plays its part in the flow, for example the government receive tax from the households and firms.
Investment Investment I includes, for instance, business investment in equipment, but does not include exchanges of existing assets. In general all the money in the economy just goes round in circles. Also with a higher growth there will be a fall in employment therefore the government would be spending less on unemployment benefits. This is acceptable, because like income, the total value of all goods is equal to the total amount of money spent on goods. Quick Definition: Circular flow of income is the economic theory that in an economy total expenditure and total income are equal.
He essentially rents out his building, so he gives capital. The circular flow of Income and Expenditures Imagine an economy that produces a single good, bread, from a single input, labor. In any exchange process, the seller or producer receives what the buyer or consumer spends. Here is the diagram which shows it more clearly. In practice, however, measurement errors will make the two figures slightly off when reported by national statistical agencies. However with higher growth the government will receive more taxes. I have also got another diagram which allows us to see the full circular flow of income diagram which is just below.
It sells his household goods and services and in particular, it sells him food and it also rents out the property and I think you could see this is already getting kind of circular here. Firms use these factors to produce goods and services which they sell to the households. He is providing all of the factors of production for the firm, so the firm can produce useful things. In both cases, expenditure and income increase equally. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government.
He's essentailly renting out his own property, but this is a nice simple example. Everything is somehow connected as all the money works its way around the economy and ends up where it started. As there will be more people working which means they will be more taxes to be paid to the government. For example goods or services which are provided by the country itself and does not include imported products or services. Anyway, the distinction between the two will be presented in due time.
Households are consuming units which absorb output produced in the business firms. This will always be the latest edition of each resource too and we'll update you automatically if there is an upgraded version to use. Another factor which affects it a lot is the balance between consumption and investment. To answer these questions, we must examine how the various parts of the economy interact. I have a feeling I said per month by accident a few times. Organisations and the business environment.
Everything here is on an annual basis. This type of inflation is not as common as demand-push inflation however it can occur independently. Now the whole reason why I did this is to kind of show you the circular flow of goods and services. For the firm, the total revenue. Because of the complication of the multiple stages in the production of a good or service, only the final value of a good or service is included in the total output. This is the essence of the circular flow of income in a two-sector economy where there is no governmental activity and the economy is a closed one. He's consuming his own labor.
Depreciation or Capital Consumption Allowance is added to get from net domestic product to gross domestic product. What are his total expenditures? And in return the firm will essentially pay rents for these factors of production. But let's say for the food. Let me do this in a different color. Put aside for future spending, i.