iPhone 5 and the Circular Flow of Income

Many of us are introducing new AS level economists to the Circular Flow of Income at the moment, and it is a joy when a great news story breaks just at the right time to use in our teaching. There has been much news and press coverage of the new iPhone 5 this week, with plenty of in depth analysis of the extras that it offers and whether it will allow Tim Cook to emerge as a genuine successor to Steve Jobs at Apple. Michael Feroli, chief economist at JP Morgan, has gone further and looked at the potential impact of the launch on US GDP, and concluded that it could add up to 0.5% to annualized gross domestic product growth in the fourth quarter. Just one little product could have that massive an effect on expanding the economy - no wonder government is keen to encourage skills to enable competitiveness and to provide the infrastructure to facilitate business growth.

This report in the Chicago Tribune breaks down the figures into a really simple illustration. If the pricing is similar to its predecessors, the iPhone 5 is likely to cost around $600. That will add $600 to domestic consumption for every phone sold in the US,within the economy's circular flow, and $600 to exports for every phone sold abroad as an injection. Feroli has calculated that the imported cost component (if similar to previous leading generation phones) would be around a $200 per phone; this is an addition to imports and therefore a leakage or withdrawal. Thus the net effect on the circular flow per phone is an expansion of $400. And as his report suggests that up to 8 million of the phones may be sold, that's an awfully big expansion!

Meanwhile, more advanced students of Behavioural Economics might enjoy Jim's report on the Business Studies blog which shows what happens when customers are asked to comment on the new iPhone 5 - little realising that it is actually just the same old i-Phone 4 that they are handling......