4.2 Introduction To Circular Flow Of Income Flashcards
What is the definition of the circular flow of income?
The circular flow of income model show how income/money flows through the different sectors of the economy.
What are the four sector in an open economy?
- Households (Individuals)
- Firms (Private Sector)
- Government (Public Sector)
- International Sector
What makes up the Leakages in the circular flow of income model?
Net Savings + Net Tax + Imports
What makes up the Injections in the circular flow of income model?
Investments + Government Spending + Exports
What is the difference in the circular flow of income model between an open and closed economy?
The addition of an international sector with exports and imports in an open economy
In the circular flow of income model, when is the market in equilibrium?
When injections are equal to leakages
What does it mean when injections are more than leakages?
Economic Growth
What does it mean when leakages are more than injections?
Economic Recession
What are injections in the circular flow of income?
Injections are additions to the economy’s circular flow
What are leakages in the circular flow of income?
Leakages is money leaving the circular flow
What is the multiplier effect?
Refers to the phenomenon where an initial injection which cases a round of spending leads to many more round of spending leading to high economic activity
What role do households play in the circular flow of income?
Households provide factors of production to firms and receive income in return, which they use for consumption.
What is the primary function of firms in the circular flow of income?
Firms produce goods and services and pay wages to households in exchange for factors of production and consumption
