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The level of national income.

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Introduction

Outline the five sectors of the economy and explain how a change in the circular flow of income will affect the level of national income, output and employment. The five sectors of an economy can be represented through a model of the circular flow diagram. They are - households, business firms, financial institutions, government and overseas sector. The Australian economy can be divided into these five sectors and is classified as an open economy. The "individual" sector of the economy is concerned with activities that would provide consumers with an opportunity to earn an income and spending money for goods and services. These individuals supply factors of production, such as labour and interprise which is used to produce goods and services to satisfy the needs and wants of consumers. Thus the individuals receive incomes in the form of rent, wages, interest and profit as a reward for supplying resources such as labour and enterprise to firms. Businesses rely on individuals to supply the resources they need and individuals depend on businesses to satisfy the good and services they require as well as to provide an income for them to purchase with. ...read more.

Middle

Another form of leakage is taxation. This is obtained by the government by taxing other sectors in the economy. When an individual pays tax this reduces the amount of money they have to spend on goods and services. Similiarly when a government taxes a business it reduces the level of funds available to pay for the resources. This leakage too, would cause a lower level of reduction in economic activity therefore causing income, output and employment opportunities to fall. However, leakages can be balanced out through investments, which is an injection and has the opposite effect of a leakage. Therefore it is recommended to spend on investments, as it would lead to a rise in expenditure, production, employment and income levels in the economy. Government expenditure also represents an injection for two ways. Firstly, when the government spends revenue on collective goods and services it provides an income to government employess and employess of private businesses from which it purchases its goods and services. ...read more.

Conclusion

However, as this occurs consumers will have less income to save, to spend on imports or to have collected as taxes. This will lead to leakages and injections to eventually balance creating equilibrium however at a lower level of income. When the total injections are greater than total leakages. This creates an upturn in the economy as consumers have more income to save, to spend on imports or to have collected as taxes. Therefore leakages ad injections will once again balance itself out to equilibrium at a higher level of income. Therefore, by altering its contributions to leakages and injections, the government has a large degree of influence over the level of economic activity, Therefore, it can be shown that for an economy to benefit, it needs to have a higher national income. This in turn would cause people to have more money in their pockets. This would lead to them to spending more which in turn would create a demand for goods to rise. This causes businesses to increase production, causing them to hire more staff, causing a decrease in unemployment. ...read more.

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