1.1 Circular flow of income

Question 1

what is the Circular flow of Income

Answer 1

Ways in which income, money, goods and services flow in an economy. Incomes flow into a household then they use their income to purchase goods and services the money flows back into firms.

Question 2

How can the size of the economy be measured?

Answer 2

Three ways;

National income: All the incomes that flow to a household overtime

National output: Value of all the goods and services produced in an economy over a period of time

National expenditure: All the spending by households, firms and government over a period of time

NOTE - Each method is used to measure the size of the economy at different points on the circular flow of income. They are all measuring the same thing and should give the same answer but they differ mainly due to problems in how and when they are measured

Question 3

Are there any problems with measuring national income?

Answer 3

Each method is used to measure the size of the economy. Since all 3 methods are measuring the same thing they should get the same answers however they often give slightly different answers due to problems in how and when they are measured.

Question 4

What are injections?

Answer 4

Routes for money to enter the circular flow of income

Investment (firms purchase goods/ services to be used in future production)

Government expenditure (government purchases goods / services)

Exports (firms sell abroad so the money leaves the foreign economy and is injected into the economy the firm operates in)

Question 5

What are leakages?

Answer 5

Routes for money to leave the circular flow of income

Savings= households choose to save rather than spend

Taxation= government takes money out of circular flow of income

Imports= households/ firms buy from foreign firms so money leaves the economy