Injections and Withdrawals Essay

Injections and Withdrawals are important features in our understanding of economic activity and the business cycle. Explain the relationship between them and how they influence national income. * Injections-only part of demand for firms arises through consumers, the remainder comes from other sources outside the inner flow. Investment- This is the money firms spend after obtaining it from various financial institutions, either past savings or loans or through new issue of shares. They may invest in equipment or building up stocks. Government Expenditure- When government spend money on goods and services produced by firms. This has a negative impact on national income as it reduces money available but can increase national income through expenditure and increased production. Export Expenditure- Money floes into circular flow from abroad when residents abroad buy our exports of goods and services. Positive for economic growth and increases national income. (source:economics) * Withdrawals- only part of households income spent goods and services, the remainder will be withdrawn from the inner flow. Net Saving- Saving is money households choose not to spend and put aside for future. If households don’t spend as much then national income falls, not many products brought, revenue falls. Whereas if they spend instead of save, national income increases. Net Taxes- Withdrawal of money from inner flow with no choice. National income increases by collecting taxes, more money available for government. However paying benefits to unemployed workers money flows other way and reduces national income. Import Expenditure- Households spend some of their income on imported goods and services. Although money consumers spend on such goods initially flows domestic retailers, it eventually finds it way abroad decreasing national income. (source:economics) GDP – Measures national income. GDP = Gross Domestic Product. * Measures of national income- > Product approach- Net saving increases, products brought and sold decreases, GDP falls which decreases national income > Income approach- Net taxes increases, households incomes are reduced and therefore have less disposable income which reduces national income. > Expenditure approach- expenditure increases more money entering economy, increasing GDP and national income. (source:Bized) Relationship between Injections and Withdrawals. Indirect links- * Saving and Investment- o If more money is saved then there will be more money for banks and other financial institutions to lend out. o Saving increases then investment falls o Saving increases then national income decreases since people are saving and not spending, GDP falls.(source: Business) * Taxation and Government Expenditure- o If tax receipts are higher, the government may be more keen to increase its expenditure. o Taxation increases government expenditure increases. o Taxation increase, households have less disposable income, hence GDP falls which reduces national income. (source:Business) * Imports and exports- o If imports increase, incomes of people abroad will increase, which will enable them to purchase more of our exports. o Imports increase then the balance of payments becomes deficit. (source:Business) * However there’s no guarantee. o Firms may wish to invest more or less than people wish to save o Governments can spend more than they receive in taxes or vice versa; o Exports can exceed imports or vice versa; (source:tutor2u.net) > Decisions to save and invest are made by different people , thus they plan to invest and save different amounts. > Demand for imports may not be equal to demand for exports > Governments may choose not to make taxation equal to government spending, it may choose to spend all of its tax revenues- budget surplus, or spend more than it receives in tax- budget deficit. THUS PLANNED INJECTIONS MAY NOT EQUAL PLANNED WITHDRAWALS. Bibliography Economics- John Sloman Business Environment- Dr Phil Drummond www.Bized.ac.uk www.Tutor2u.net