4.2.2.1_-_The_circular_flow_of_income

Question 1

How are wealth and income correlated?

Answer 1

It is likely that an individual with a high income will also have a high wealth because they will be able to purchase more expensive assets and have more money to save

Question 2

How can national income be measured?

Answer 2

National income can be measured by GDP, GNP and GNI.

Question 3

How do exports relate to the circular flow of income?

Answer 3

Exports are an injection into the economy, since goods and services are sold to foreign countries and revenue in earned from the sale.

Question 4

How do firms and households affect the economy?

Answer 4

Firms and households interact and exchange resources in an economy. This makes up the national output

Question 5

How do imports relate to the circular flow of income?

Answer 5

Imports are a withdrawal from the economy, since money leaves the country when goods and services are bought from abroad.

Question 6

How do net injections relate to the level of national output?

Answer 6

If there are net injections into the economy, there will be an expansion of national output.

Question 7

How do net withdrawals relate to the level of national output?

Answer 7

If there are net withdrawals from the economy, there will be a contraction of production, so national output decreases.

Question 8

How does the multiplier effect link to injections into the circular flow?

Answer 8

When an injection is made into the circular flow, the actual change in the national income is greater than the initial injection, this is called the multiplier effect

Question 9

How is income different to wealth?

Answer 9

Unlike income which is a flow of money, wealth is a stock concept (stockpile or resources). These resources aren’t currently being used in the circular flow of income, but they could be used at some point

Question 10

How is saving calculated?

Answer 10

Income - Spending

Question 11

What are some examples of how savings impact the circular flow of income for specific countries?

Answer 11

In the UK, there is a traditionally low savings rate, especially during periods of high economic growth, and this means that the rate of investment is also low.
In Japan there is a high savings rate and with this comes a high level of investment

Question 12

What are the leakages in the circular flow also known as?

Answer 12

Withdrawals

Question 13

What do firms supply to households

Answer 13

Firms supply goods and services to households. Consumers pay firms for these

Question 14

What do households supply firms with?

Answer 14

Households supply firms with the factors of production, such as labour and capital, and in return, they receive wages and dividends.

Question 15

What does income equal in the circular flow of income?

Answer 15

income = output = expenditure

Question 16

What does investment refer to in macroeconomics?

Answer 16

Investment refers to physical investment, not financial investment.

Question 17

What does the circular flow suggest?

Answer 17

That as households keep spending what they earn, and firms keep using their revenues to produce more goods using the same inputs, then national output(and national income) won’t change

Question 18

What does the size of the multiplier effect in the circular flow depend on?

Answer 18

It depends on the rate at which money leaks from the circular flow e.g. the bigger the leakages, the quicker the money will leave the circular flow and the smaller the multiplier effect will be.
So if lots of money is being spent on imports (or used as savings or tax) then the multiplier effect will actually be quite small because the injection will quickly leak out of the circular flow

Question 19

What happens if injections to the circular flow are greater than withdrawals?

Answer 19

This means that expenditure is greater than output , so firms will increase output. As a result national output , income and expenditure will all increase

Question 20

What happens if withdrawals from the circular flow are greater than injections

Answer 20

This means that output is greater than expenditure, so firms will reduce output. As a result national output, income and expenditure will all decrease

Question 21

What is a withdrawal into the circular flow income?

Answer 21

A withdrawal from the circular flow of income is money which leaves the economy. This can be from taxes, saving and imports.

Question 22

What is also included in the circular flow of income?

Answer 22

International trade

Question 23

What is an injection into the circular flow of income?

Answer 23

An injection into the circular flow of income is money which enters the economy. This is in the form of government spending, investment and exports. These go directly to firms

Question 24

What is full employment income?

Answer 24

Full employment income is the total output of an economy when unemployment is minimised or is at the government target. This accounts for frictional unemployment.

Question 25

What is it called when households spend the money they get from the national income on the goods and services that firms create?

Answer 25

National expenditure (value of this spending)

Question 26

What is meant by a monetary flow?

Answer 26

Curved arrows - I.e. the money that pays for the ‘physical things’

Question 27

What is meant by a physical flow?

Answer 27

Straight arrows - Physical flow of ‘real things’ i.e. goods, services, labour, land and capital

Question 28

What is national income?

Answer 28

National income is the total value of the goods and services a country produces. It is the output in one year.

Question 29

What is Nominal income?

Answer 29

Income that is not adjusted for changes in purchasing power (inflation) i.e. nominal wages is the amount of money that people are paid

Question 30

What is Real income?

Answer 30

Income that takes into account inflation, thereby representing the actual purchasing power of people’s income

Question 31

What is the circular flow of income?
// Draw diagram

Answer 31

Spending and income circulates around the economy in the circular flow of income, which is represented in the diagram above

Question 32

What is the money paid to households by firms for the factors of production they provide called?

Answer 32

National income

Question 33

What is wealth?

Answer 33

The total value of all the assets owned by individuals or firms in an economy

Question 34

When does an economy reach a state of equilibrium relating to the circular flow?

Answer 34

The economy reaches a state of equilibrium when the rate of withdrawals = the rate of injections.

Question 35

Which formula shows the circular flow of income?

Answer 35

National output = National income = National expenditure

This formula is only true when a country is operating at full employment. At full employment national income, national output, national expenditure are all equal to the full employment income

Question 36

Show Economic Growth using a PPF Diagram

Answer 36

A rise in a nation’s productive capaicty causes the PPF to shift out and this allows increased supply both of consumer and capital goods.