2.4.1 + 2.4.2 - National Income & Injections + Withdrawals

Question 1

What Is The Circular Flow Of Income?
(2 Points)

Answer 1

~ Economic model that illustrates money flows in an economy.

~ Movement of spending and income throughout the economy.

Question 2

What Is The Role Of Households In The Circular Flow Of Income?
(3 Points)

Answer 2

~ Provide firms FOPs.

~ Receive factor incomes from firms as a reward for providing the FOPs.

~ Spend factor incomes on goods and services made by firms.

Question 3

What Is The Role Of Firms In The Circular Flow Of Income?
(2 Points)

Answer 3

~ Combine FOPs from households to make goods and services.

~ Give away wages to workers as a reward for their FOPs.

Question 4

Describe Withdrawals (Leakages) Into The Circular Flow
(4 Points)

Answer 4

~ There is an assumption that consumes spend all their income on back into the economy, but there are considerations this model doesn’t take into account about consumer spending.

~ Savings (S) -> Money made from firms can be saved.

~ Tax (T) -> Incomes can be taxed by the government.

~ Imports (M) -> Income can be spent on goods abroad.

Question 5

Describe Injections Into The Circular Flow
(4 Points)

Answer 5

~ There is an assumption that the only expenditure in the economy is by households (Consumers), but there are other ways that expenditure can take place in the economy.

~ Investment (I) -> Spending by firms on capital goods.

~ Government Spending (G) -> Spending by the government.

~ Exports (X) -> Spending by foreigners.

Question 6

How Can The Circular Flow Show Economic Growth?
(4 Points)

Answer 6

~ By comparing the level of injections and withdrawals.

~ Injections > Withdrawals = Rise in economic growth.

~ Withdrawals > Injections = Fall in economic growth.

~ Injections = Withdrawals -> Macroeconomic equilibrium.

Question 7

How Can GDP Be Calculated From The Circular Flow?
(4 Points)

Answer 7

~ Used to compare with different period of time, to see if the level of economic growth is rising or falling.

~ Output Method Of Calculating GDP -> Looking at the final value of all goods and service produced in an economy, within a year.

~ Income Method Of Calculating GDP -> Looking at all the factor incomes earned in the economy in a year.

~ Expenditure Method Of Calculating GDP -> Look at the total expenditure on a countries goods and services in a year.

Question 8

What Is Income?

Answer 8

Flow measured over a given period of time.

Question 9

What Is Wealth?

Answer 9

Stock of assets with market value that can generate income.

Question 10

How Do Income & Wealth Link Together?

Answer 10

High income -> assets -> generate more income -> surplus income can be used to purchase more assets.

Question 11

Describe The Reasons For Differentials In Income & Wealth
(4 Points)

Answer 11

~ Age -> older more earning potential -> due to more skills and experience -> demand higher wages.

~ Education -> more qualifications -> greater earning potential.

~ Ownership of financial assets and property -> those who own can lead to an unequal distribution of income.

~ Wage differentials.