4.2 Introduction to the circular flow of income Flashcards
What is an open economy?
An open economy is one in which there is foreign trade
What is a closed economy?
A closed economy is one in which there is no foreign trade
What is the circular flow of income?
The circular flow model demonstrates how money moves from producers to households and back again in an endless loop. In an economy, money moves from producers to workers as wages and then back from workers to producers as workers spend money on products and services.
What is wealth?
Wealth is the value of a stock of assets owned by someone
- savings in bank accounts
- ownership of real estate
- shares / stocks in a business
What is income
Income is the flow of money going to factors of production
Wages and salaries
Rental income from property
Interest from savings
What is an injection?
An injection into the circular flow is a monetary addition to the economy
What are the 3 injections? (pneumonic)
IGE
Investment - Spending by firms on new capital equipment like factories, offices and machinery
Government spending - Spending by central, local and other government agencies
Exports - Spending by foreigners on goods and services made in the UK
What is a leakage?
A withdrawal from the circular flow is money that is removed from the economy
What are the 3 leakages?
STI
Saving by households/firms - Money which is saved and not spent
Taxes paid to the government- Taxes take money from both households and firms
Imports - Goods and services that are bought from abroad by both households and firms
What happens when injections are larger than leakages?
Economic growth
What happens when leakages are larger than injections?
Decrease in economic growth
