The Circular Flow of Income

The circular flow of income • Blue arrows indicate the flow of money in one direction • Red arrows symbolise the flow of material in the opposite direction to the blue arrows o Important to note that in this simplified version of the economy there is no government, foreign trade or financial sector • Factors of production such as labour, capital, land and enterprise flow from household to firm while money flows in the opposite direction o This is an exchange of factors for income • In this model all factors of production are provided by households. Firms do not own their factors of production (such as capital) Criticising GDP • • • GDP doesn’t consider environmental degradation GDP doesn’t consider societal safety GDP doesn’t consider happiness and health GDP • GDP is made up of o The value of goods and services (output) o All the country’s spending o The UK’s income Historical events which affected GDP • • Growth in GDP o 2012 Olympics ▪ The sales of Olympics tickets were 'saved up' in GDP until this quarter. This amounted to around £580m (or 0.1% of GDP) and contributed 0.2 percentage points to overall growth. o Financial big bang Reduction in GDP o 2008 financial crisis ▪ Redundancy levels rose by 160% to 311,949 between Jan to Mar 2008 and Feb to Apr 2009. ▪ The number of people claiming unemployment benefits rose by 103% between Jan 2008 and Sep 2009, reaching the highest level in over 12 years. ▪ o Household expenditure fell by nearly 6%, from Jan to March 2008 to Apr to June 2009. Riots and strikes 1979-1981 ▪ Unemployment was at a 50-year high in 1981. The riots left 300 buildings severely damaged. Around 5,000 people were involved in the Brixton riots. Consumer Price Index (CPI) • • • What is CPI and how is it measured? o The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them When was the Cassette recorder added to the basket? o Added in 1976 and taken out in 1987 What is the UK’s current inflation rate? o 12 month inflation rate was 0.8% in December 2020 up from 0.6% in November 2020