1.1 Circular Flow Of Income

Question 1

What is an Injection in the circular flow of income model ?

Answer 1

An injection into the circular flow of income is spending which does not come from households

Question 2

What are the 3 types of Injections in the circular flow of income model ?

Answer 2

1) Investment (I) - the total spending on new capital goods (factories, machinery) by firms
2) Government spending (G) - the total spending on goods and services by the (central and local) government
3) Exports (X) - the total spending on goods and services In the domestic economy by foreign buyers (Households, firms and governments)

Question 3

What is a leakage in the circular flow of income model ?

Answer 3

A leakage (withdrawal) from the circular flow of income is spending by households which does not flow back to firms.

Question 4

What are the 3 types of leakages in the circular flow of income model ?

Answer 4

1) saving (S) - the part of income that is not spent by households
2) Taxation (T) - the total flow of income to the government; total tax revenue taken from firms and households
3) Imports (M) - the total spending by domestic buyers (households, firms and the government) on goods and services produced in foreign economies

Question 5

What does the circular flow of income model look like ?

Answer 5

The Circular flow of income model with injections and leakages

Question 6

What is macroeconomic equilibrium ?

Answer 6

The economy is said to be in macroeconomic equilibrium, with no tendency for income/output/expenditure to rise or fall, when Injections = Withdrawals

If Injections > withdrawals, there will be a rise in National income
If Injections < withdrawals, there will be a fall in National income

Question 7

How to measure National income and what is GVA?

Answer 7

• The key measure of national income is GDP at market prices
• GDP is measured at market prices which includes the value of indirect taxes (VAT)
• therefore a more accurate measure is Gross Value Added = GDP - VAT + subsidies

Question 8

What are the different ways of measuring GDP ?

Answer 8

1) The expenditure method
2) The income method
3) The output method

Question 9

What is the expenditure method for measuring GDP?

Answer 9

Add up the value of:
- Consumer spending (C)
- Investment expenditure(I)
- Government spending (G)
- Net exports (NX)

Question 10

What is the income method for measuring GDP?

Answer 10

Add the value of:
- income from employment
- income from self-employment
- Rental income
- Gross trading profits of private firms
- Gross trading profits of public corporations
- other incomes

Question 11

What is the output method for measuring GDP ?

Answer 11

Add the value of:
- Primary sector output (Raw materials)
- Secondary sector out (manufacturing)
- tertiary sector output (services)
- Minus stock appreciation

Question 12

What is the GDP deflator and how to use it ?

Answer 12

• GDP deflator = (Nominal GDP/Real GDP) x 100
  The GDP deflator is an index therefore in the base year is equal to 100
• If you know the GDP deflator you can also calculate Real GDP in the given year. Real GDP = Nominal GDP x (100/GDP deflator)