2.4.1 National income Flashcards

1
Q

Circular flow

A

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.

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2
Q

Circular flow diagram

A
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3
Q

National output

A

The goods and services produced by firms in an economy.

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4
Q

National income

A

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

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5
Q

National expenditure

A

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

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6
Q

How does income flow between firms and households?

A
  • 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.
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7
Q

Two flows in the circular flow

A
  • 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’.
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8
Q

Wealth

A

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).
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9
Q

3 ways of measuring GDP

A

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)

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10
Q

Income

A

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.

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11
Q

Correlation between wealth and income

A

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.

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12
Q

Role of households in the circular flow

A

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.

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13
Q

Role of firms in the circular flow

A

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.

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