2.4.1 National Income

Question 1

Define circular flow of income

Answer 1

The circular flow of income is a model that describes how money moves within an economy. It illustrates the flow of goods, services, and money between different sectors.

Question 2

What are the key components of the Circular Flow of Income

Answer 2

Households: Provide factors of production (labor, land, capital) to firms and receive wages, rent, and profits in return.
Firms: Produce goods and services, paying households for their factors of production and receiving revenue from selling products.
Government: Collects taxes from households and firms, and spends on public services and welfare.
Financial Sector: Facilitates saving and investment by households and firms.
Foreign Sector: Engages in trade with the domestic economy through exports and imports.

Question 3

What kinds of flows occur in the circular flow of income model?

Answer 3

Real Flow: Movement of goods and services (e.g., labor, products).
Money Flow: Movement of money (e.g., wages, consumer spending).

Question 4

What are the three leakages and injections?

Answer 4

Leakages: Savings, taxes, and imports, which remove money from the circular flow.

Injections: Investment, government spending, and exports, which add money to the circular flow.

Question 5

Define income

Answer 5

Refers to the flow of money received, typically measured over a period (e.g., monthly or annually).
Sources include wages, rent, interest, and profits.
Example: A teacher’s annual salary is a form of income

Question 6

Define wealth

Answer 6

Refers to the stock of assets owned at a given point in time.
Includes physical assets (real estate, cars) and financial assets (stocks, bonds).
Example: Ownership of a house and shares in a company represent wealth.

Question 7

What are the key differences between income and wealth

Answer 7

Measurement Period: Income is measured over time; wealth is measured at a point in time.

Nature: Income is a flow concept; wealth is a stock concept.

Real-World Example: An individual earning $50,000 per year from their job has an income of $50,000. If they own a house valued at $300,000 and stocks worth $50,000, their wealth totals $350,000.