2.6 The Circular Flow Of Income

Question 1

What is the Circular flow of Income ? (CFOY)

Answer 1

Connections between different sectors of the economy that revolves around flows of goods and services and FoP between firms and households

Question 2

What does a ‘Closed Economy’ look like ?

Answer 2

• Household -> Consumption(C) -> Firm
• Firm -> Income(Y) -> Household
• Firm -> Output(O) -> Household
• Household -> Labour -> Firm

Question 3

What does an ‘Open Economy’ look like ?

Answer 3

• Identical to Closed Economy BUT:
• Withdrawals = Imports(M), Savings(S), Tax(T)
• Injections = Exports(X), Investment(I), Gov.Spending(G)

Question 4

What must be true for an economy to be in equilibrium ?

Answer 4

Injections must be equal to Withdrawals