Circular Flow Flashcards
What is the circular flow in economics?
A diagrammatic representation of economic activity in a given time period.
Which main sectors are identified in the circular flow?
Households, firms, the government, and foreign sector.
What do monetary flows in the circular flow consist of?
Income, spending, and taxation.
What do real flows in the circular flow consist of?
Goods and services, and production factors.
In what direction do real flows move compared to money flows?
Real flows move in the opposite direction to money flows.
What are injections in the circular flow?
Investment (I), government spending (G), or exports (X).
What are leakages in the circular flow?
Savings (S), taxes (T), or imports (M).
What condition indicates that an economy is in equilibrium?
Injections (J) equals the rate of leakages (L).
What happens to national income (GDP) if injections increase?
National income (GDP) will decrease.
What happens to national income (GDP) if leakages increase?
National income (GDP) will decrease.
What does (I-S) represent?
The private sector balance.
What does (G-T) represent?
The budget balance of the public sector.
What does (X-M) represent?
The balance on the current account with the foreign sector.
What do households do with part of their income?
Save it with financial institutions.
How do financial institutions use the savings from households?
They lend these savings to firms to finance their investment projects.
How does the government utilize national income?
By taking taxes to finance government spending in the economy.
What occurs when households and firms import products?
Some income flows to other countries.
What happens to income when other countries buy exports?
Income returns to the country.
What type of economy does South Africa have?
An open economy.
