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Circular flow - open economy with government

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You need to be able to:

Explain, using a diagram, the circular flow of income in an open economy with government and financial markets, referring to leakages/ withdrawals (savings, taxes and import revenue) and injections (investment, government revenue and export revenue).

Remember that equilibrium is when the circular flow is stable (not growing and not shrinking) and is when:

                        Injections = Withdrawals

Investment + Gov. Spending + Export Revenue = Saving + Taxes + Import spending

                            I+G+X = S + T + M

NB It is not necessary for one component to equal its counterpart (eg saving does not have to equal investment) equilibrium is when the whole LHA equals the whole RHS.

NB if
I+G+X > S + T + M the economy (Flow) is increasing
NB if
I+G+X < S + T + M the economy (Flow) is decreasing

Remember:             Y=E=Q Must be true at all times
                        (because we are measuring the same thing in three different ways)