2.4 - National income

Question 1

The extended circular flow model

Answer 1

The flow of income and spending in a whole economy. Made up of consumer expenditure / consumption and total factor income payments which flow from firms to households (wages, rents, profits/dividends and interest)

Question 2

Circular flow of income model

Answer 2

a model that describes how money moves within an economy. It illustrates the flow of goods, services, and money between different sectors.

Question 3

Components of circular flow of income

Answer 3

• Households: Provide factors of production (labor, land, capital) to firms and receive wages, rent, interests and profits in return.
• Firms: Produce goods and services, paying households for their factors of production and receiving sales revenue from selling products.
• Government: Collects taxes from households and firms, and spends on public services and welfare.
• Financial Sector: Facilitates saving and investment by households and firms.
• Foreign Sector: Engages in trade with the domestic economy through exports and imports.

Question 4

Real Flow

Answer 4

Movement of goods and services (e.g., labour, products).

Question 5

Money Flow

Answer 5

Movement of money (e.g., wages, consumer spending).

Question 6

Injections

Answer 6

Injections are monetary additions to the economy:
> government spending (G),
> investment (I)
> exports (X).

Question 7

Withdrawals/leakages

Answer 7

Withdrawals or leakages are where money is removed from the economy:
> taxes (T)
> savings (S)
> imports (M).

Question 8

Describe what happens to the economy in terms of the proportion of leakages/withdrawals and injections

Answer 8

• If the sum of injections is greater than the sum of leakages/withdrawals, then the economy will be growing
• whilst if injections are smaller than withdrawals, it will be shrinking.

Question 9

Income

Answer 9

Refers to the flow of money received, typically measured over a period of time

Question 10

Wealth

Answer 10

Refers to the stock of assets owned at a given point in time.

Question 11

Differences between wealth and income

Answer 11

• Measurement Period: Income is measured over time; wealth is measured at a point in time.
• Nature: Income is a flow concept; wealth is a stock concept.