2.4.1 National income

Question 1

Circular flow

Answer 1

The circular flow of income explains the link between national output, national income and national expenditure.

Question 2

Circular flow diagram

Answer 2

Question 3

National output

Answer 3

The goods and services produced by firms in an economy.

Question 4

National income

Answer 4

The money paid to households by firms for factors of production.

Question 5

National expenditure

Answer 5

The value of money (national income) spent by households on the goods and services created by firms.

Question 6

How does income flow between firms and households?

Answer 6

• An economy is made up of firms and households.
• Firms produce goods and services.
• Households in a country provide the labour, land and capital that firms use to produce the national output.
• Households spend the money they get from the national income on the goods and services that firms create.

Question 7

Two flows in the circular flow

Answer 7

• A physical flow of ‘real things’ – i.e. goods, services, labour, land and capital.
• A monetary flow – i.e. the money that pays for the ‘physical things’.

Question 8

Wealth

Answer 8

The the total value of all the assets owned by an individual or firms in an economy.

• Assets can include actual money (e.g. savings) and physical items (e.g. houses or cars).

Question 9

Income

Answer 9

A flow of money in the economy, whereas wealth is a stock of assets that aren’t currently being used in the circular flow, but in the future could be used to generate income.

Question 10

Correlation between wealth and income

Answer 10

Although wealth and income are different things, there is a correlation between them.

For example, it is likely that an individual with a high income will also have high wealth because they’ll be able to purchase more expensive assets and have more money to save.

Question 11

Role of households in the circular flow

Answer 11

Households own the wealth (factors of production) in the economy.

They supply their factors of production to firms and receive income as a reward:

They receive:
- Rent for land
- Wages for labour
- Interest for capital
- Profit for enterprise

With this income, they purchase goods and services from firms.

Question 12

Role of firms in the circular flow

Answer 12

Firms purchase factors of production from households.
- They use these resources to produce goods/services.
- They sell the goods/services to households and receive revenue.