Circular Flow

Question 1

What is the circular flow of income model and what sectors does it divide the economy into

Answer 1

a macroeconomic model that describes the flows of resources , goods/services and income between the parts of the economy (households, firms, financial, government, overseas)

Question 2

HOUSEHOLDS AND FIRMS SECTOR: explain the household sector and firms sector

Answer 2

household - the owners of the productive resources

firms - employers of resources that produce all goods and services for the economy

Question 3

HOUSEHOLDS AND FIRMS SECTOR: explain the factor market - real and money flow

Answer 3

real flow - goods services and resources

money flow - spending and income

Question 4

HOUSEHOLDS AND FIRMS SECTOR: explain the product market

Answer 4

households and firms spend their income earnt on goods and services produced by firms

Question 5

FINANCIAL SECTOR: explain what makes up the financial sector (savings and investment)

Answer 5

financial institutions make up the financial sector which is the intermediary between savers and investors (surplus funds of savers create a pool of funds which investors can use)

Question 6

FINANCIAL SECTOR: what is savings and what does represent

Answer 6

money saved from household income not spent on consumption is then deposited into financial institutions.
represents a leakage from the circular flow because it reduces the flow of money/goods between households/firms

Question 7

FINANCIAL SECTOR: what is investment and what does it represent

Answer 7

expenditure on goods not intended for current consumption (capital)
represents an injection (offsets leakage) that increases production of final goods for consumers and future income flow

Question 8

GOVERNMENT SECTOR: explain transfer payments

Answer 8

the redistribution of income/wealth by means of gov payment (health/education/defense)

Question 9

GOVERNMENT SECTOR: how much of the workforce does the gov employ

Answer 9

the 3 levels of income employ 18% of workforce

Question 10

GOVERNMENT SECTOR: what is a leakage from gov sector

Answer 10

tax is a leak from the real and money flows between households/firms (wages/salaries = income tax, GST, business tax)

Question 11

GOVERNMENT SECTOR: what is an injection from gov sector (1. current/2. capital exp)

Answer 11

gov spending is an injection
current expenditure = spending on current g/s (wages, fuel, power)
capital expenditure = spending on capital investment goods aka public/social infrastructure (schools, roads, hospitals)

Question 12

OVERSEAS SECTOR: explain the open economy

Answer 12

trade allows us to buy items we cannot produce ourselves and allows foreigners to buy products they they cannot produce with their resources

Question 13

OVERSEAS SECTOR: explain 3 examples of ‘open economy’

Answer 13

1. China and India buys Aus iron ore
2. Japan buys natural gas
3. students from asia/africa by uni education

Question 14

OVERSEAS SECTOR: what are the leakages and injections for the gov sector (explain)

Answer 14

imports = leakage  (a transaction is an import when the money flows from Aus to for investment)
exports = injection )when the money is from overseas into Australia)

Question 15

FULL CIRCULAR FLOW: What does the full model recognise (3 points)

Answer 15

1. the financial sector exists to match the needs of households with surplus income and firms that wish to to borrow for investment
2. the gov provides many community needs, financed by tax
3. trade with other countries provides for the needs we can’t produce ourselves in return for g/s that are surplus for us

Question 16

explain how the full circular flow is interdependent

Answer 16

whenever levels of spending are changing , the size of real/money flows shown in circular flow must also change

Question 17

give 3 examples of how full circular flow is interdependent

Answer 17

increase investment in capital equipment by the business sector = everyone in economy benefits (money/real flow increases)

rise in taxes = reduce amount of money that people have to spend (reduce production, fall in income)

rise in exports = bring more money in flow (increase income)