2.4.1 National income Flashcards
Circular flow
The circular flow of income explains the link between national output, national income and national expenditure.
This links how money goods/services circulates between households, businesses and consumers.
Circular flow diagram
National output
The goods and services produced by firms in an economy.
National income
The money paid to households by firms for factors of production.
National expenditure
The value of money (national income) spent by households on the goods and services created by firms.
How does income flow between firms and households?
- 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.
Two flows in the circular flow
- 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’.
Wealth
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).
3 ways of measuring GDP
Y=O=E
- Income method (Y) :the the total of all factor incomes received from wages, interest rent, profits.
- Output Method (O)
- Expenditure method (E)
Income
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.
Correlation between wealth and income
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.
Role of households in the circular flow
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.
Role of firms in the circular flow
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.