2.4.1 - National income

Question 1

What is the definition for the circular flow of income?

Answer 1

This is an econmic model showing the flow of income of goods and services, the factors of production and their payments between households and fimrs within an economy.

Question 2

What does it mean when the economy is assumed to be “closed” ?

Answer 2

This means there is no foreign trade and no government influence.

This mean the only groups left are:

• Households
• Firms

Question 3

What are the four factors of production?

*remember CELL

Answer 3

Capital, enterprise, land and labour

Question 4

Draw a circular flow of income

Answer 4

Page 125 for the simple model in your theme 2 booklet. Search it up on google for the actual model.

Question 5

What is land used for?

Answer 5

Buildings

Question 6

What is labor used for?

Answer 6

Output

Question 7

What is capital used for?

Answer 7

Investment

Question 8

What is rent used for?

Answer 8

Land

Question 9

What are wages paid for?

Answer 9

Labor

Question 10

What is interest paid for?

Answer 10

Capital

Question 11

What is profit made from?

Answer 11

Entrepreneurship

Question 12

Why is the circular flow of income unrealistic?

Answer 12

• It says that households spend all their money on goods and services
• Firms spend all their money on factors of production
• There is no government
• There is no foreign trade

Question 13

What is income?

Answer 13

This money generated from wealth. For example, wages, rent and savings.

Question 14

What is wealth?

Answer 14

Wealth is a stock concept. Human wealth such as skiils and education. Also, assests owned such as buldings, land, savings and shares.

Question 15

What is the link between income and wealth?

Answer 15

• An increase in income will have a direct impact on wealth, providing the finance for investment
• Investing in the productive capacity of the economy will increase the stock of physical assets, therefore increasing wealth
• This will lead to economic growth and higher income in the future
• In turn, this will allow us to further increase out stock of wealth
• However, there is an oppportunity cost betweeen consumption today and consumption in the future
• But to go back on track, by investing in our stock of wealth by increasing productive capacity, we can increase our future income.

Question 16

What is a trade-off?

Answer 16

A trade-off implies that choices have to made between different objectives of economic policy. For example, a trade-off between economic growth and inflation.