Economic Circular Flow Model

With reference to the above graph, more details and insights can be obtained as follows.

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Economic activities

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Government

Roles
- Regulate other economic sectors and economic markets
- Fiscal policy – control tax payment and government spending (via intermediary – government)
- Monetary policy – control saving and investments (via intermediary – financial institutions)
- Trade policy – control import and exports (via intermediary – foreign countries)

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Gross Domestic Product (GDP)

Expenditure method
All spending within a country over a period of time
- GDP = C + I + G + X;
- C = consumption
- I = gross investment; net investment = gross investment – depreciation (capital stock), then formula become NDP (Net Domestic Product)
- G = government spending
- X = net export; i.e. export - import (E – I)
- This method is moderate reliable

Income method
- All income earned by employee, self-employed, corporate and government within a country over a period of time
- This method is least reliable

a) GDI = COE + GOS + GMI + T&S on production & imports
- COE = compensation of employee, represents pre-tax wages paid to employee
- GOS = gross operating surplus, represents surplus of incorporated business, also refer as “profits”. COS = sale of final G&S – cost of G&S – COE. Gross as it does not account for depreciation of capital
- GMI = gross mixed income, represents surplus of unincorporated business and self-employed. Mixed as it does not distinguish profits (employer) and wages (employee).
- T&S = add tax and less subsidies on products

b) GDI = R + I + P + W + SA
- R = rental income
- I = interest income
- P = profits, W = wages
- SA = statistical adjustments, may include corporate income tax, dividends and undistributed profits.