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This model will use the following
definitions:
Consumption (C) - consumption goods produced and
sold to customers i.e., the chairs.
Savings (S) - income that is not spent on
consumption.
Investment (I) - production of, or expenditure
on, non-consumption goods (carried out by firms)
including expenditure on increasing stocks of
consumption goods...
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They will also have savings - income
not spent on consumption. Similarly producers will
not just spend on producing goods but will also
carry out investment - expenditure on
non-consumption goods.
There are therefore injections into (investment)
and leakages from (savings) the circular flow.
These injections and leakages can now be added to
the circular flow model (see Figure 2)
Figure 2
Notes to Figure 2
In this model the income earned by households (Y)
must be equal to expenditure on purchasing
national product (E)...
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