Chapter 3: The Economic Circular Flow Model Flashcards
Name and explain the three major flows in the economy
Production, Spending and Income
Production is not necessarily pursued for its own sake but rather to satisfy human wants
Essentially production creates income that is then used for spending.
Production employs labour, capital and natural resources to produce goods and… in return household are rewarded for their labour through income** which is then spent** on consumer goods
Name two differences between stocks and flows
Stocks have no time dimensions. Flows have a time dimension.
Stocks are measured at a specific moment. Flows are measured over a period.
Name the factors of production
Natural Resources
Labour
Capital
Entrepreneurship
What is the difference between quantity and quality of labour
Quantity of labour depends on the size of population that are able and willing to work known as the labour force.
Quality of labour is the skills, knowledge and health of the workers
What is capital as a factor of production
It is the manufactured resources such as machines tools and buildings (tangible resources) that are used to produce other goods and services
What is sometimes seen as a fifth factor of production
Technology
What is not seen as a factor of production and why
Money, because it is only a medium of exchange
What does the economic question of HOW solve?
It essentially involves choosing the best method of production whether it is capital or labour intensive
Name the four sources of income and which factor of production they belong to
Rent (natural resources)
Wages (labour)
Interest (capital)
Profit (entrepreneurship)
What does the total income in the economy consist of
Rent, wages and salaries, interest and profits
Name the sources of spending
Households (C)onsumers
Firms
Government
Foreign Sector
What are the characteristics of Households (C)
They are also called consumers
Maximise satisfaction
They own most factors of production and sell them on the factor market to firms
In exchange for their services they are rewarded with an income in the form of wages, salaries, rent, interest and profit
They use their income to buy consumer goods and services in the goods market which are then used to satisfy human wants
What are the characteristics Firms (I)
They are also known as the production agents since they decide how goods and services will be produced
Profit maximisation
They buy factors of production in the factor market
They transform the factors of production into goods and services which are then sold in the goods market
One of the factors of production purchased by firms is capital. Thus when firms buy capital goods for them it’s an investment
What is the difference between goods market and factor market
Goods market is where consumer goods and services are bought and sold
Factor market is where factors of production are purchased and sold
Draw the circular flow of goods and services then also draw the circular flow of income and spending that excludes the government
Check slides 18 & 19
What are the characteristics of the Government (G)
The government set up the frameworks (legal) within which the economy operates.
They purchased factors of production from households and they also purchase goods and services from firms in the goods market
Provides public goods and services such as roads and health
Which of finance by levying tax on income (income tax) and expenditure (VAT) on households and firms
Also transfers some of its tax revenue to needy people (e.g. pension funds, child-support and grants)
Draw the circular flow of income and spending that includes the government
Slide 22
Write down the formula for total expenditure
A=C+I+G + (X-Z)
What are the characteristics of the Foreign Sector (X-Z)
The foreign sector is all countries and institutions outside of the country’s borders
Exports (X) are items produced in a country but sold to the rest of the world
Imports (Z) are produced in the rest of the world but purchased for use in a country
Explain injections and list them
Injections are a boost in the circular flow leading to multiplied expansion of output
Investment spending (I)
Government (G)
Exports (X)
Explain leakages and list them
Leakages are a withdrawal from the circular flow reducing money available in the rest of the economy
Taxes (T)
Savings (S)
Imports (Z)
What are the laws of comparative advantage
Specialisation
Exchange
Opportunity cost
Name the five macro economic objectives
- Economic growth
Increase of production and income - Full employment
Low unemployment - Price stability
Low inflation - Balance of payments stability
- Equitable
Decreased poverty and a narrow gap between the rich and poor
What is the balance of payments
It’s an accounting record, it summarises transactions between South African households, firms, governments and foreign households during a particular period
South Africa’s factor endowment
Natural resources
Labour
Capital
Entrepreneurship
