2.4.1 national income

Question 1

The circular flow of income:

what does the circular flow of income show?

why is the two sector model too simplified, what other sectors must be included?

in the diagram what are the three ways that economic activity can be measured?

Answer 1

-the circular flow of income shows the flow of goods and services, money and factors of production between firms and households.

-the 2 sector model is too simplified as it does not represent the actual economy, the overseas sector, gvernment sectorand financial services sectors must be added as they take into account taxation, government spending, investment and savings.

-economic activity can be measured via the expenditure method/output method/national income method (income paid by firms to household in return for the factors of production provided).

Question 2

what is the difference between wealth and income

Answer 2

wealth is a stock of assets, whils income is a flow. Wealth are things people own, whilst income is the money they receive