Chapter 1: Circular Flow

Question 1

Households

Answer 1

Households are known as the primary economic participants because they own and control the factors of production and are the consumers of goods and services.

Question 2

Firms

Answer 2

A firm is a business that produces good and services.

These good and services are consumed by households.

Firms also purchase factors of production from households.

Question 3

Government

Answer 3

Government is a term that is used to refer to local, regional ( provincial) and national government,it includes all politicians, civil servants, government agencies and others bodies under the control of government.

Government are known as the public sector

Question 4

Foreign sector

Answer 4

The foreign sector consists of all firms, financial intermediaries, governments and households outside the country. Trade between the foreign sector,households and firms takes place in the foreign market in the form of the import and export of products if a foreign firm buys a business in our country, then this would be an inflow of foreign investment.

When a foreign firms sells their assets owned in our country it is called an outflow of foreign investment.

Question 5

Financial sector

Answer 5

The financial sector consists of banks, insurance companies, pension funds and the( JHB) stock exchange (JSE) . This sector represents those financial institutions who are not directly involved in the production of goods and services but act as a link (intermediary) between Households and firms that have a surplus of money, and other participants in the economy who require funds.

Question 6

Income (Y)

Answer 6

Income (Y)- Remuneration for the use of the factors of production in the form of rent , wages, interest and profits.

Question 7

Imports (M)

Answer 7

Imports (M) -goods and services produced in other country and purchased by local firms or households.

Question 8

Exports (X)

Answer 8

Exports (X) -goods and services produced locally and then sold to the foreign sector.

Question 9

Tax (T)

Answer 9

Tax (T) - A compulsory payment made by a private individual or business enterprises to the local or central government for which there is no direct benefit.

Question 10

Public goods and services

Answer 10

Public goods and services provided by the state for use by all the members of a society.

Question 11

Savings (S)

Answer 11

Savings (S) - the money which households and firms provide to financial institutions. It represents that part of income which is not consumed.

Question 12

Investment (I)

Answer 12

Investment (I) - the flow of money from the financial sector to business.

Question 13

Real flow

Answer 13

Real flow- the flow of goods and services from firms to households and factors of production from households to firms, and the public goods provided by the government.

Question 14

Money flow

Answer 14

Money flow- the flow of money between the different economic participants. Economic participants.

For example remuneration received by households in the form of wages, rent, interest and profit, sale revenue to firms and taxes paid to government

Question 15

Consumption spending (C)

Answer 15

Consumption Spending (C)-the total value of all spending by households on goods and services.

Question 16

Government spending (G)

Answer 16

Government spending (G)- the total value of expenditure by the government on goods and services.

Question 17

Model equations 1

Answer 17

(Y)- income

(C)- consumption spending

(G)- Government spending

(I)- Investment

(X)- Exports

(M)- Imports

Question 18

Model equations mathematical equations

Answer 18

This relationship is represented by the following equation:

Y= C + I + G + (X - M)

Since the level of income in the country is also equal to the value of GDP, we can re-write this equation as follows:

GDP= C + I + G + (X - M)

This equation is used to calculate the total value of production (i.e. GDP) in a country.

Question 19

Explain the difference between real and money flow in the circular flow model of the economy?

Answer 19

A: Money flow and real flow are the two main aspects of the circular flow of income economic model. … Real flows refer to the flow of the actual goods or services, while money flows refer to the payments for the services (wages, for example) or consumption payments.

Question 20

Give examples of three real flow in a open economy?

Answer 20

Real flow:

Factors of production flow from the owners (households) to producers via the factor markets.

Goods and services flow from the producers via the goods markets to households and other users of goods and services.

Factors of production and goods and services flow from foreign countries to South Africa (imports).

Factors of production and goods and services flow from South Africa to foreign countries (exports).

1( households)

2 (imports)

3 (exports)

Question 21

Give examples of three money flow in an open economy?

Answer 21

Money flow:

Factor remuneration represents the expenditure of producers and the income of households (wages, rent, interest and profit).

On the other hand, consumption expenditure represents the expenditure of households and the income of producers.

1 (wages)

2 (Rent)

3 (interest)

Question 22

Injection (J) into the circular flow model.

Answer 22

Injection represents the introduction of additional money into the economy.

(Injection any spending which is not derived from income)

In a open economy the injection are:

(1) government spending (G)
(2) The revenue earned from exports (X)
(3) Investment spending by firms (I)

Question 23

The value of (J) Injection is calculated by the following model

Answer 23

Model equation: J = G + X + I

Question 24

Leakages (L) from the circular flow.

Answer 24

Leakage (L) - any flow of money which does not give rise to a further round of income from within the economy. In an open economy the leakages are:

: Taxes (T)

: Expenditure on imports (M)

: Savings (S)

Question 25

Model equation: the value of L is calculated by the following model equation

Answer 25

The value of L is calculated by the following model equation: L = T + M + S

Leakages (L) =

Taxes (T)

expenditures on imports (M)

Savings (S)