Cambridge International AS and A Level Economics: National income statistics and the circular flow (9708)

This guide covers sections 4.1 (National income statistics) and 4.2 (Introduction to the circular flow of income) of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. Topic 4 is AS Level content. A Level candidates study it too, and the syllabus treats AS content as assumed knowledge for A Level Papers 3 and 4. Every country, firm and figure below is invented for illustration. None is a real statistic.

Start from the Cambridge A Level Economics hub or the printable checklist. After this guide, use the revision notes and the practice questions. To see where you stand first, take a free 10-minute diagnostic.

What this guide covers

Section	What you must be able to do
4.1.1	Explain the meaning of national income
4.1.2	Define and measure GDP, GNI and NNI
4.1.3	Adjust a measure from market prices to basic prices
4.1.4	Adjust a measure from gross values to net values
4.2.1	Describe the circular flow in a closed and an open economy: flows between households, firms, government and the international economy
4.2.2	Identify injections and leakages (the multiplier is not required)
4.2.3	Explain equilibrium and disequilibrium (marginal and average propensities are not required)

Money is in currency units (cu), and totals are for one year.

4.1.1 The meaning of national income

National income is the worth of everything an economy produces, together with the incomes earned from producing it, over a period of time, usually a year. It is the main measure of how large an economy is and how well it is performing.

The same total can be seen in three ways. Firms produce output. Producing it pays out incomes as wages, rent, interest and profit. Those incomes are spent on the output. Over a year, output, income and expenditure are three views of one flow, which is why the circular flow in 4.2 works.

National income is a flow, measured over a period, not a stock held at one moment. Compare it with the stock of wealth, which is the value of assets owned on a given date.

4.1.2 GDP, GNI and NNI

The syllabus names three measures. Each answers a slightly different question.

Measure	Definition	Question it answers
GDP (Gross Domestic Product)	The total value of final goods and services made inside the country over a year, whoever owns the factors of production	How much was produced inside the country?
GNI (Gross National Income)	GDP plus net primary income from abroad	How much income did the country’s residents and their factors earn?
NNI (Net National Income)	GNI minus depreciation	How much income is left after allowing for capital that wore out?

Net primary income from abroad is the income earned abroad by a country’s residents and factors (such as profit sent home by a firm owned by residents, or wages earned abroad) minus the income earned in the country by foreign-owned factors and sent out.

Only final goods and services are counted. A loaf of bread counts once, at the price of the finished loaf. The flour sold to the baker is an intermediate good, and counting it too would double count.

GNI = GDP + (income earned abroad by residents - income paid abroad to non-residents)
NNI = GNI - depreciation

Worked example 1: from GDP to NNI

Country A (illustrative) has GDP of 640 billion cu. Its residents earn 38 billion cu abroad, and foreign owners take 55 billion cu out. Depreciation is 64 billion cu.

Net primary income = 38 - 55 = -17
GNI = 640 + (-17) = 623
NNI = 623 - 64 = 559

GNI is below GDP because more income leaves the country than enters. If net primary income were positive, GNI would exceed GDP.

Worked example 2: a negative case

Country B (illustrative) has GDP of 800 billion cu, income earned abroad of 20 billion cu and income paid abroad of 70 billion cu. Net primary income is 20 - 70 = -50, so GNI = 750. With depreciation of 90 billion cu, NNI = 750 - 90 = 660.

A large gap between GDP and GNI means output produced inside the country is not the same as income received by its people. Much of the output may be owned from abroad.

4.1.3 Market prices and basic prices

Two prices can be used to value output.

• A market price is what the buyer pays. It includes taxes on products, such as a sales tax or a duty charged per unit, and it is lowered by any subsidy on the product.
• A basic price is what the producer receives. It excludes taxes on products and includes subsidies on products.

Basic price = market price - taxes on products + subsidies on products

Taxes on products go to the government, not the producer, so a value at market prices overstates the payment to producers. A subsidy on a product is paid to the producer, so the market price understates it.

The same adjustment works on national totals:

GDP at basic prices = GDP at market prices - taxes on products + subsidies on products

Worked example 3: market to basic prices

In Country A, taxes on products are 72 billion cu and subsidies on products are 16 billion cu. The net adjustment is 72 - 16 = 56.

GDP at basic prices = 640 - 72 + 16 = 584
GNI at basic prices = 623 - 56 = 567
NNI at basic prices = 559 - 56 = 503

A unit example: a bakery sells a cake for 118 cu. The price includes a product tax of 18 cu, and the bakery also receives a 4 cu subsidy per cake. Basic price = 118 - 18 + 4 = 104 cu.

4.1.4 Gross values and net values

Gross means before allowing for depreciation. Net means after. Depreciation (capital consumption) is the fall in value of the capital stock over the year because machines, vehicles and buildings wear out or become obsolete.

Net figures matter because part of gross output only replaces worn-out capital. The economy is not better off by that part. NNI shows the income that could be consumed or saved without running down the capital stock.

Net value = gross value - depreciation

The adjustment can be applied to GDP as well. Net Domestic Product is GDP minus depreciation. Do not confuse the gross-to-net step, which removes depreciation, with the market-to-basic step, which removes product taxes and adds product subsidies. They are separate adjustments and can be made in either order.

Worked example 4: working backwards

Country B (illustrative) reports NNI at basic prices of 910 billion cu. Depreciation is 120, net primary income from abroad is +35 (earned abroad 85, paid abroad 50), taxes on products are 140 and subsidies on products are 30. Find GDP at market prices.

NNI at market prices = 910 + 140 - 30 = 1,020
GNI at market prices = 1,020 + 120 = 1,140
GDP at market prices = 1,140 - 35 = 1,105
GDP at basic prices = 1,105 - 110 = 995

When you work backwards, reverse each adjustment and its sign.

4.2.1 The circular flow of income

The circular flow is a model of how money moves between sectors. Leakages leave the flow and injections enter it. It starts simple and gains sectors.

Two sectors, closed economy. Households supply factors of production to firms. Firms pay households wages, rent, interest and profit (income). Households spend that income on firms’ goods and services (consumer expenditure). Goods and services flow one way and money the other, so one loop is real flows and the other money flows.

Three sectors, closed economy. The government joins. Households and firms pay taxes to it. It spends on public services, transfer payments and subsidies. A transfer payment is money paid out with no good or service in return.

Open economy. The international economy adds a fourth sector. Households buy imports, which sends money abroad. Foreign buyers purchase exports, which brings money in.

   FIRMS ---- goods and services ---------> HOUSEHOLDS
   FIRMS <--- consumer spending ----------- HOUSEHOLDS
   FIRMS ---- incomes: wages, rent, -------> HOUSEHOLDS
              interest, profit
   FIRMS <--- factors of production -------- HOUSEHOLDS

   Leakages leave the loop:  savings, taxes, imports
   Injections enter it:      investment, government spending, exports

In a closed economy the flow involves households, firms and the government. In an open economy it also involves the international economy, through exports and imports.

4.2.2 Injections and leakages

Leakages (withdrawals)	Injections
Savings (S): income not spent	Investment (I): spending by firms on capital goods
Taxes (T): income paid to government	Government spending (G): spending on goods and services
Imports (M): spending on foreign output	Exports (X): foreign spending on domestic output

Savings are a leakage because they are not passed back to firms as spending. Savings placed with banks can return as investment, but that return is the injection I, not the saving itself. Only government spending on goods and services is an injection here. Transfer payments are just money moving from the government to households.

Imports are a leakage because the money goes to foreign firms. Exports are an injection because they create income for domestic firms.

4.2.3 Equilibrium and disequilibrium

The circular flow is in equilibrium when national income is stable, with no tendency to rise or fall. That happens when total injections equal total leakages.

Closed, two sectors:      S = I
Closed, three sectors:    S + T = I + G
Open economy:             S + T + M = I + G + X

• If injections exceed leakages, more is being added to the flow than leaves it. Spending exceeds income, firms respond by producing more, and national income rises. As income rises, leakages rise too, until they equal injections. That is the new equilibrium.
• If leakages exceed injections, spending falls short of income. Firms cut output and national income falls. Leakages fall with it until the two are equal again.

Disequilibrium is the state when injections and leakages are unequal, so national income is changing. The model does not say the equilibrium is desirable. An economy can settle at an income level that leaves many workers unemployed.

Worked example 5: finding the direction of change

Country C (illustrative) has savings of 90, taxes of 140 and imports of 75, so leakages are 305. Investment is 100, government spending is 150 and exports are 55, so injections are 305. The economy is in equilibrium.

Firms raise investment by 25. Injections become 330 against leakages of 305, a net injection of 25. National income rises.

Separately, suppose investment stays at 100 and exports fall from 55 to 20. Injections are 100 + 150 + 20 = 270 against leakages of 305, a net leakage of 35. National income falls.

The size of the final change in income is not asked for here, because the multiplier is not required in this section.

Common errors

• Treating GDP and GNI as the same. GDP is about where output happens. GNI is about whose income it is.
• Adding net primary income to GDP with the wrong sign when it is negative.
• Subtracting depreciation to get from GDP to GNI. Depreciation is the gross-to-net step.
• Subtracting subsidies when moving from market to basic prices. Taxes on products come off and subsidies on products go on.
• Calling government transfer payments an injection. Only government spending on goods and services is.
• Describing saving as a leakage and then saying bank lending is the same thing as investment. Investment is spending on capital goods.
• Saying equilibrium means injections and leakages are zero. Equilibrium means they are equal.

Next steps

Use the revision notes for a compact summary and a self-test, then the practice questions with worked answers.

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).