Cambridge A Level Economics: National income statistics and the circular flow (9708) – Revision Notes

These notes condense sections 4.1 and 4.2 of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. They are AS Level content (topic 4), assumed knowledge for A Level Papers 3 and 4. Full explanations are in the study guide. All figures here are invented and money is in currency units (cu).

Related pages: the Cambridge A Level Economics hub, the printable checklist, the practice questions and the free 10-minute diagnostics.

Key definitions

Term	Definition
National income	The worth of output, together with the incomes earned producing it, over a period, usually a year
GDP	Total value of final goods and services made inside the country over a year, whoever owns the factors
Net primary income from abroad	Income earned abroad by residents less income paid to foreign owners of factors in the country
GNI	GDP plus net primary income from abroad
NNI	GNI minus depreciation
Depreciation	Fall in the value of the capital stock over a year through wear and obsolescence (capital consumption)
Market price	Price the buyer pays, including taxes on products and net of product subsidies
Basic price	Price the producer receives: market price minus product taxes plus product subsidies
Injection	Spending that enters the circular flow from outside household consumption
Leakage (withdrawal)	Income that leaves the circular flow without returning as spending on domestic output
Equilibrium	National income is stable because injections equal leakages
Disequilibrium	Injections and leakages differ, so national income is changing

4.1 National income statistics

Formulas

Step	Formula
Domestic to national	GNI = GDP + (income earned abroad - income paid abroad)
Gross to net	Net value = gross value - depreciation
Market to basic	Basic price value = market price value - product taxes + product subsidies
Basic to market	Market price value = basic price value + product taxes - product subsidies

Method in steps

1. Write down which measure you start from (GDP, GNI or NNI) and whether it is at market or basic prices.
2. Do the net primary income step first if you are moving between GDP and GNI. Keep its sign.
3. Do the depreciation step if you are moving between gross and net.
4. Do the price step if you are moving between market and basic prices. It uses the net of taxes and subsidies on products.
5. Label each line. The steps are independent, so the order does not change the answer.

Worked reminder

Country D (illustrative) has GDP at basic prices of 350 billion cu. Product taxes are 52, product subsidies are 12, income earned abroad is 31, income paid abroad is 24 and depreciation is 41.

GDP at market prices = 350 + 52 - 12 = 390
Net primary income = 31 - 24 = +7
GNI at market prices = 390 + 7 = 397
NNI at market prices = 397 - 41 = 356

Must-know distinctions

Pair	Difference
GDP and GNI	GDP is output inside the borders. GNI is income received by residents and their factors, wherever earned
Gross and net	Net removes depreciation. It is the income left after replacing worn-out capital
Market and basic prices	Market prices include product taxes and exclude product subsidies. Basic prices do the reverse
Final and intermediate goods	Only final goods count. Intermediate goods would be double counted
Flow and stock	National income is a flow over a period. Wealth is a stock at a date

4.2 The circular flow of income

Sectors and flows

Model	Sectors	Added flows
Closed, two sectors	Households, firms	Incomes to households. Consumer spending to firms
Closed, three sectors	Plus government	Taxes to government. Government spending and transfer payments out
Open economy	Plus international economy	Imports (money out). Exports (money in)

Injections and leakages

Leakage	Injection
Savings (S)	Investment (I)
Taxes (T)	Government spending (G)
Imports (M)	Exports (X)

Equilibrium conditions

Two sectors:    S = I
Three sectors:  S + T = I + G
Open economy:   S + T + M = I + G + X

Method in steps: direction of change

1. Add up leakages. Add up injections.
2. Subtract: injections minus leakages.
3. A positive result means national income rises. A negative result means it falls. Zero means equilibrium.
4. Say why it stops: leakages rise as income rises (and fall as it falls) until they match injections.

Worked reminder

Country E (illustrative): S = 30, T = 50, M = 40. I = 45, G = 55, X = 20. Leakages are 120 and injections are 120, so the economy is in equilibrium. If exports fall to 8, injections are 108 against leakages of 120. The net leakage is 12, so national income falls.

Second worked reminder: working backwards

Country G (illustrative) reports NNI at market prices of 480 billion cu. Depreciation is 55, income earned abroad is 18 and income paid abroad is 62.

GNI = 480 + 55 = 535
Net primary income = 18 - 62 = -44
GDP = 535 - (-44) = 579

Check: 579 - 44 = 535, and 535 - 55 = 480. Always check a backwards answer by running it forwards.

Chains of reasoning to know

Why GNI differs from GDP. Foreign-owned firms produce in the country, so output is counted in GDP. Their profits are sent abroad, so they do not count as income of residents. Net primary income falls, and GNI is below GDP. The reverse applies when residents own factors abroad.

Why use basic prices. Taxes on products go to the government and subsidies go to producers. Basic prices strip out those two items, so the value reflects what producers actually receive for their output.

Why a fall in exports reduces national income. Exports are an injection. A fall means injections are below leakages. Spending on domestic output is lower than income, firms cut output, and incomes fall. Leakages fall as income falls, until they match the lower injections.

Why equilibrium is not always desirable. The model fixes where income settles. It does not say whether that income employs all workers, or whether growth is sustainable.

Why savings are a leakage but can fund investment. Saving removes income from the spending loop at the moment it occurs. Banks may lend the money to firms. That lending becomes an injection only when firms spend it on capital goods.

Circular flow: quick sketch

Household income  ->  [spend on domestic output]  ->  firms
       |                                                 |
   leakages: S, T, M                          injections: I, G, X
       |                                                 |
       +-- national income stable when the two totals are equal --+

Quick self-test

1. Country A has GDP at market prices of 330, product taxes of 41 and product subsidies of 11. Calculate GDP at basic prices.
2. Country G has GDP of 215, income earned abroad of 14 and income paid abroad of 9. Calculate GNI.
3. Country H has GNI of 410 and depreciation of 38. Calculate NNI.
4. State whether each is an injection or a leakage: (a) exports, (b) saving, (c) income tax paid by households.
5. Explain why a government pension payment is not counted as an injection.
6. In an open economy, injections are 100 (I 30, G 45, X 25) and leakages are 95 (S 20, T 40, M 35). State and explain the direction of change in national income.
7. State why a firm’s purchase of flour from a miller is not added to GDP separately from the bread it sells.
8. Explain one reason why GNI could be lower than GDP.
9. Define depreciation and say why NNI can be a more useful measure than GNI.
10. Explain why an economy in equilibrium may still have high unemployment.

Answers

1. 330 - 41 + 11 = 300.
2. Net primary income = 14 - 9 = 5, so GNI = 215 + 5 = 220.
3. 410 - 38 = 372.
4. (a) Injection. (b) Leakage. (c) Leakage.
5. A pension is a transfer payment. It moves money from the government to households without any good or service being produced in return. Only government spending on goods and services is an injection, so the pension is not.
6. Injections minus leakages = 100 - 95 = +5. Spending exceeds income, so national income rises, until leakages have risen to 100.
7. The flour is an intermediate good. Its value is already inside the price of the bread, so counting both would be double counting.
8. More income is paid to foreign owners of factors working in the country than residents earn abroad, so net primary income is negative.
9. Depreciation is the fall in the value of the capital stock over the year through wear and obsolescence. NNI removes it, so it shows income left after replacing capital.
10. Equilibrium only means injections equal leakages. The level of national income at that point may be too low to employ everyone who wants work.

Where marks are usually lost

• Writing the formulas the wrong way round, for example adding taxes on products when moving to basic prices.
• Using depreciation to move between GDP and GNI.
• Dropping the minus sign when net primary income is negative.
• Calling a transfer payment, or bank deposits, an injection.
• Giving a definition of GDP that leaves out final goods or the time period.
• Stating that income rises or falls without linking it to injections and leakages.
• Calculations with no units, or with the starting measure and price basis left unstated.
• Treating equilibrium as the same as full employment or as a good outcome.

Official syllabus

Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, sections 4.1 and 4.2 (Cambridge University Press & Assessment).