2.1 Economic activity Flashcards
What does the circular flow of income model illustrate?
the concepts and relationships of macroeconomics
What does a simple and closed economy mean?
simple = no governement
closed = no foreign exchange (imports and exports)
What are the two parties in the circular flow of income?
households (consumers)
firms (businesses)
What are the factors of production?
- land
- labour
- capital
- entrepreneurship
(CELL)
What are the factor rewards (income)?
- rent
- wages
- interest
- profit
(WIRP)
How do the factors of production relate to their rewards?
households supply factors of production to the resource market, in return, firms supply factor rewards for them
capital = interest
entrepreneurship = profit
land = rent
labour = wages
How does household expenditure relate to goods and services?
they are both traded in the product market. Households supply expenditure which is revenue for firms. In return, firms supply the goods and services consumers are buying.
In a closed economy, what is equal?
income flow (from firms to households)
=
expenditure flow (from households to firms)
therefore output of the economy is equal to either one of these flows
What does the closed economy model assume which is unrealistic?
- no government
- no foreign sector
- households spend all that they earn (no savings/investments; no financial sector)
What are the leakages?
- savings (money is not spent)
- taxes (money is paid to the government)
- imports (money is spent beyond the economy)
What are the injections?
- investment (beyond revenue, i.e. from stocks, bonds etc.)
- government spending
- exports (able to trade with foreign markets and bring money into the domestic market)
How do the leakages relate to the injections?
Saving is saved by consumers in the financial market (banks), firms invest into capital goods using funds borrowed from the financial markets
Taxes is paid to the governement, which is later spent and reinvested
Income is lost to foreign markets by importing, but can be rectified by gaining income from foreign markets by exporting
What does an open economy mean?
when there are links to foreign markets i.e. international trade happens
Are leakages and injections equal?
likely unequal.
leakages and injections negate eachother, but not perfectly.
if leakages > injections: income flow becomes smaller.
If injections > leakages: income flow becomes larger.
How is economic activity measured?
national income; aggregate output
What are the different approaches to measuring aggregate output and how does this relate to the circular flow of income?
considering expenditure = income (circular flow)
- expenditure approach, amount spent of goods and services
=
- income approach, amount earned by factors of production
=
- output approach, value of goods and services produced
Components of GDP
- Consumption
- Investment
- Government spending
- Net exports (exports - imports)
Equation for GDP/AD
C + I + G + ( X - M ) = GDP
C + I + G + ( X - M ) = AD
Why is GDP equal to AD?
Output approach (GDP) = expenditure approach (AD)
Difference between nominal GDP and real GDP
nominal does not account for changes in price (inflation)
real does
What does GDP, GNI, GNP stand for?
GDP - Gross Domestic Product
GNI - Gross National Income
GNP - Gross National Product
What does per capita mean?
per person.
e.g. GDP per capital is GDP divided by the population
Why is GDP per capita used?
- to compare production between different population sizes
- evaluating the impact of population growth (increase in labour)
How is GDP different from GNP/GNI?
GDP is about any economic activity WITHIN a region (location; activity)
GNP/GNI is the total output of a country REGARDLESS of its location (nationality; ownership)
