4.2.2.1 - Circular Flow Of Income Flashcards
What is the circular flow of income
An economic model showing the flow of goods and
services, factors of production and payments between
households and firms within a closed economy.
What are households in the model:
Households out the wealth of the nation - land , labour, capital and enterprise.
What to households do with their wealth
They supply their wealth to firms in return for an income - wages, tenants rent, profit, dividends
What do households do with their income from firms
Buy goods and services that are produced by the firms
What are the assumptions of the model
For the model to work we must assume that:
·households spend all of their income on goods and services
· firms spend all of their income on factors of production
·there is no government interfering With the markets
· there is no foreign trade
Why is the circular flow of income model not realistic
The uk economy is complex and operates in a global environment meaning that foreign trade takes place- the model is over simplified
Define income
A flow concept, money that is generated through wealth that contributes to an income which is received per annum
Define wealth
A stock concept, assets (buildings, land, savings, shared) that are owed contribute to wealth along with human wealth ( skills and education)
Relationship between income and wealth
A nations income and a nations wealth is directly proportional because the flow of income comes from the stock of wealth
Add from page 3 of GoodNotes
