2.1 Introductory Lesson Flashcards
What does the circular flow of income show?
- The circular flow shows connections between different sectors of our economic system.
- It revolves around flows of goods/services, factors of production, and money, between households, governments, and firms and also abroad
Draw the circular flow model
How do injections into the circular flow lead to a multiplied expansion of output?
- People spending money on UK exports
- Government spending
- Investment
What are the 3 injections in the circular flow of income model?
- Government spending
- Exports
- Investments
What are the 3 injections in the circular flow of income model?
- Government spending
- Exports
- Investments
What are the leakages from the circular flow?
- People spending money on imports
- People save money
- People being taxed
What are the 3 withdrawals from the circular flow model?
- Imports
- Taxation
- Saving
What would increase the output of an economy? (Circular flow of income)
- When Injections > Leakages
- Exports, Government spending, Investments > Imports, Taxation, and Saving
- This will lead to an increase in the output of an economy
What would decrease the output of an economy? (Circular flow of income)
- When Injections < Leakages
- Exports, Government spending, Investments < Imports, Taxation, and Saving
- This will lead to an decrease in the output of an economy
What is spare capacity?
- Spare capacity is when there are spare factors of production (Including Land, Labour and Capital)
If the economy grows too quickly, what might the economy experience?
- As the economy keeps on growing there will be a continual decrease in spare capacity
- Little spare capacity leads to higher wages which in turn leads to increased prices
- Therefore leading to inflation
What might the government/central bank do if the economy was in a recession?
- Decrease interest rates
- Increase government spending and decrease taxes
- Subsidies like eat out to help out
What is a recession?
- 2 consecutive quarters of negative growth
- A quarter refers to one-fourth of a year
What does real mean?
Real means inflation adjusted
What does Nominal mean?
Nominal means before inflation/raw value
Why are Index Numbers used in economics?
To allow comparison and to simplify
What is the formula for Index Numbers?
What is the formula for percentage change?
What might the government do if the economy is growing too quickly?
- Increase interest rates
- Stop government spending
- Increase taxes (very unpopular)
