2.4.1 National income

Question 1

Circular flow of income

Answer 1

Firms and households interact and exchange resources in an economy. Households supply firms with the factors of production, such as labour, land, capital and enterprise, and in return, they receive wages, rent, dividends and profit.
Firms supply goods and services to households. Consumers pay firms for these. This spending and income circulates around the economy in the circular flow of income (represented in diagram). Therefore, national income= national output=national expenditure.

Question 2

Injections and withdrawals

Answer 2

• Saving income removes it from the circular flow. This is a withdrawal of income. Investing money into the economy is an injection.
• Taxes are also a withdrawal of income, whilst government spending on public and merit goods, and welfare payments, are injections into the economy.
• International trade is also included in the circular flow of income. Exports are an injection into the economy, since goods and services are sold to foreign countries and revenue in earned from the sale. Imports are a withdrawal from the economy, since money leaves the country when goods and services are bought from abroad.
• The economy reaches a state of equilibrium when the rate of withdrawals = the rate of injections.

Question 3

Income vs Wealth

Answer 3

• Income is a flow of money that goes to the factors of production e.g. wages, welfare payments, profits, dividends, rents and interest are forms of income.
• Wealth is a stock of assets e.g. savings, shares, property, bonds and pension schemes.