Circular flow and quantitative elements Flashcards
what is the aim of any goods economy
to satisfy its populations wants and needs
welfare and prosperity of a country depend on what
the volume of production in it
final goods and services
all manufactured goods and services that satisfy human wants and needs
(have form utility)
capital goods and services
all goods and services not directly consumed. help manufacture other goods and other services
LEARN CIRCULAR FLOW PG 3 BOOK 2
..
Definition of final consumption expenditure by households (C)
households constantly buy goods and services. they spend money trying to satisfy their unlimited needs and wants
total of expenditure in a given year is known as
consumption expenditure
importance of expenditure by households (5)
- consume goods and services but also provide factors of production
- the more they earn the more they spend
- consumption spending of households accounts for about 64% of total spending in the economy
- makes up a huge percentage of GDP
- consumption is very important driver of economic growth
Definition of final consumption expenditure by government (G)
indicates how the government uses its income to finance goods and services needed by the public sector
what does final consumption expenditure by the government include (2)
- the spending of all departments of central, provincial and local government
- consumption expenditure on services rendered to the communities
3 divisions of government expenditure
functional division
administrative division
financial division
what is the importance of final consumption expenditure by the government (4)
- gov provides the legal framework for the economy to operate frequently
- A lot of the spending is on enforcing laws that entrench private ownership of property
- enables the market economy to function well, drive economic growth and create jobs
- gov is responsible for important injections into the circular flow
what two parts does gross capital formation consist of in the national accounts
- gross fixed capital formation (production and purchasing of capital goods)
- change in inventories
when does gross fixed capital formation take place (2)
- when there is an increase in the country’s capital stock
- when money is contributed towards the economy’s ability to manufacture consumer goods and services
what does the word gross mean in gross fixed capital formation
it means that no provision has been made for consumption of fixed capital
in the circular flow, investment takes place in which areas
- private households
(family savings in the banks are borrowed by firms for investment purposes) - business sector
(businesses invest their profits in the production process) - state
(gov purchases of goods and services are intended to create future benefits) - foreign sector
(contributions made in the form of injections)
what is the importance of gross fixed capital formation? (5)
- capital formation is important for economic growth
- increase in capital formation will expand the production
- increase in capital formation through investment in the private sector will reduce the unemployment rate in the economy
- Will increase the income and welfare of workers, resulting in an increase in the economic growth rate of the country
- improved infrastructure will ensure that the distribution of goods and services through the existing markets will be easier
what are national account aggregates
methods that are used to determine the value of economic activity
what are three different ways that economic activity is measured
- production method
- income method
- expenditure method
how does the production method calculate gdp at basic prices
adds final values of all goods and services
how does the income method calculate gdp at factor prices
adds all income earned by owners of factors of production
how does the expenditure method calculate gdp market prices
Adds spending of four main economic sectors
what is the four main economic sectors
consumption
government
investments
exports (minus imports)
what is the production (output value) method
method whereby we determine the gdp at basic prices by adding the final values of all goods and services
