2. circular flow model Flashcards
What is the circular flow model?
It is an economic model that represents the flow of income (money) that move around between various groups (sectors) in an economy.
What are the 2 sectors and markets, in the basic CFM?
Household sector which sells in the resources market and buys products from product market, and firms/business sector which sells in the product market and buys resources from the resource market.
Resource market / Product market
Land, labour, capital, entrepreneurship / goods and services
Money flow in Basic CFM
households spending > consumption > firms revenue > cost of production > wages, rent, interest, and profit for households
Real flow
Households sell > land, labour, capital entrepreneurship > firms buy and use to produce goods and services > households buy the goods and services and sell more resources
5 sector CFM, name the sectors
Firms, Households, Government sector, Financial sector, Foreign sector
Role of household sector
income earned is used:
for consumption (to buy goods and services),
to pay taxes, to save (invest in savings), carry out import spending (import other goods and services)
Role of business sector (issa bit iffy)
profit earned is used:
to buy resources for production (cover cost of production), pay taxes, borrow from financial sector to carry out investments in new equipment, import resources from foreign countries.
Role of government sector
Receive funds in form of taxation and government charges, and use them for government purchases.
Role of financial sector
Includes banks, investment funds, and other financial sector firms. Links savers and investors. ( Receive funds in the form of savings from households, and lend out these funds as loans with interest rate)
Role of foreign sector
importing from overseas households, government, and firms, and exporting to overseas households, government, and firms.
What are leakages
money flows from the household sector that reduce their subsequent spending on production of domestic based firms.
forms of leakages are?
- Taxes: involuntary contribution to the government from individuals and firms, in relation to income, profits, or goods and services sold. Flows to government.
- Savings: portion of income not spent on consumption of goods and services. Flows to financial sector.
- Imports: portion of income spent on purchasing goods and services from other countries. Flows to foreign sector.
what are injections?
additional spending that flows to firms and therefore to the circular flow of income within the economy
forms of injections are?
- government spending: money spent by all levels of the government, including government consumption spending and investment spending. Flows to firms.
- Investment: any spending that increases the capital stock of the economy, including firms spending on new equipment or households spending on new homes (also including any increase in firms’ inventories, unsold output). Flows to firms
- Exports: Revenue from goods and services sold to other countries. Flows to firms.
