Circular flow

Question 1

What are the main factors of injections?

Answer 1

Exports - goods sold abroad result in an inflow of money from foreign countries
Investment - expenditure on additional capital adds to the circular flow
Government spending - building/expanding public services

Question 2

What are the main factors of withdrawals?

Answer 2

Imports - Money sent to foreign countries for their goods/raw materials
Savings - households saving rather than spending money
Taxes - Reductions from national income

Question 3

How do households and firms directly interact with each other?

Answer 3

Households —> firms
Land, labour, capital
Firms —> households
Goods and services

Question 4

How would an increase in exports affect the circular flow?

Answer 4

Injections increase
More money in the circular flow
More money is received by domestic firms from abroad, increasing profits
Household incomes increase as firms give out larger dividends, employ more people, raise wages, increase spending on land or raise more capital (interest)
Household expenditure increases, firms see more expenditure for their goods and services, so their profits rise

Question 5

How would a fall in income tax affect the circular flow?

Answer 5

Withdrawals decrease
Money is effectively added to the circular flow
More money is received by consumers, increasing their disposable income
Consumption increases as households have more money to spend on goods and services, increasing firms’ profits.
They therefore employ more factors of production, meaning household income increases.

Question 6

What is national income?

Answer 6

The money paid by firms to households to employ their factors of production.
Land
Labour
Capital
Enterprise/entrepeneurship