2.4.1 + 2.4.2 - National Income & Injections + Withdrawals

Question 1

What Is The Circular Flow Of Income?

Answer 1

Economic model that illustrates money flows in an economy.

Question 2

What Is The Role Of Households In The Circular Flow Of Income?
(3 Points)

Answer 2

~ Provide FOPs for firms.

~ Receive factor incomes, as a reward for providing the FOPs.

~ Spend factor incomes on goods and services, made by firms.

Question 3

What Is The Role Of Firms In The Circular Flow Of Income?
(2 Points)

Answer 3

~ Combine FOPs, to make goods and services.

~ Give away wages to workers, as a reward for their FOPs.

Question 4

Describe Withdrawals (Leakages) Into The Circular Flow
(4 Points)

Answer 4

~ Assumption -> Consumers spend all their income back into the economy

Simple Model Doesn’t Take Into Account:
~ Savings (S) -> Money made from firms can be saved.

~ Tax (T) -> Incomes can be taxed by the government.

~ Imports (M) -> Income can be spent on goods abroad.

Question 5

Describe Injections Into The Circular Flow
(4 Points)

Answer 5

~ Assumption -> The only expenditure in the economy is by households.

Simple Model Doesn’t Take Into Account:
~ Investment (I) -> Spending by firms on capital goods.

~ Government Spending (G) -> Spending by the government.

~ Exports (X) -> Spending by foreigners.

Question 6

How Can The Circular Flow Show Economic Growth?
(4 Points)

Answer 6

~ By comparing the level of injections and withdrawals.

~ Injections > Withdrawals = Rise in economic growth.

~ Withdrawals > Injections = Fall in economic growth.

~ Injections = Withdrawals -> Macroeconomic equilibrium.

Question 7

How Can GDP Be Calculated From The Circular Flow?
(4 Points)

Answer 7

~ Used to compare different period of time, to see if the level of economic growth is rising or falling.

~ Output Method Of Calculating GDP -> Looking at the final value of all products produced in an economy, within a year.

~ Income Method Of Calculating GDP -> Looking at all the factor incomes earned in the economy in a year.

~ Expenditure Method Of Calculating GDP -> Look at the total expenditure on a countries products in a year.

Question 8

What Is Income?

Answer 8

Flow, measured over a given period of time.

Question 9

What Is Wealth?

Answer 9

Stock of assets with market value that can generate income.

Question 10

How Do Income & Wealth Link Together?

Answer 10

High income -> assets -> generate more income -> surplus income can be used to purchase more assets.

Question 11

Describe The Reasons For Differentials In Income & Wealth
(4 Points)

Answer 11

~ Age -> older, more earning potential -> due to more skills and experience -> demand higher wages.

~ Education -> more qualifications -> greater earning potential.

~ Ownership of financial assets and property -> leads to an unequal distribution of income.

~ Wage differentials.