The circular flow of income concept, the equation income = output = expenditure, and the concepts of equilibrium and full employment income
Money flows continuously between households and firms in a loop. At any point in that loop, the total value of income, output, and expenditure in the economy are always equal.
Formula
Y = C + I + G + (X − M) | Income = Output = Expenditure
Real World
During the 2008 financial crisis, UK GDP fell as the circular flow broke down — banks stopped lending, firms cut investment, households reduced spending, demonstrating how disruption at one point ripples around the entire loop.
Exam Focus
Draw and annotate the circular flow diagram in 'explain' questions; a labelled diagram with withdrawals and injections earns dedicated marks.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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