5 - The Circular Flow Of Income Model Flashcards
What is national income?
The level of total output in an economy
What are closed and open economies?
Closed - no foreign trade
Open - foreign trade
What is the circular flow of income in a simple economy?
Households own the wealth of the nation (land, labour and capital)
They supply this to firms in return for income (wages, interests and profit)
They use this money to buy goods and services
Firms produce goods and services and hire factors of production from household and sell goods and services back to households
What is consumptions?
When households spend money on goods and services produced by firms
What does the circular flow of income model show?
There are three ways of measuring the level of economic activity National Output (O) National Expenditure (E) National Income (Y)
What is national output (O)?
The value of the flow of goods and services from firms to households
What is national expenditure (E)?
The value of spending by households on goods and services
What is national income (Y)?
Value of income paid by firms to households in return for factors of production
How are income, expenditure and output related?
They are three ways of measuring the same flow so they must be identical not just equal
(Shown by = with 3 lines)
What are injections?
Spending which does not come from households
What are the three types of injection?
Investment by firms on new capital or stocks
Government spending
Exports / Spending by foreigners
What are the three types of withdrawals?
Saving by households and firms
Taxes paid to the government
Imports from abroad
What happens to the circular flow model in equilibrium?
No tendency to change
Injections = withdrawals
Expenditure, output and income are the same
What happens to the circular flow model when injections are greater than withdrawals?
National income will rise to reflect greater spending
What happens to the circular flow model when injections are less than withdrawals?
Spending will fall
