Circular-Flow Model Flashcards
(47 cards)
the study of the economy as a whole, where economists study aggregates/totals
Macroeconomics
What is the circular flow model?
the circular flow model is a simplified economic model that describes the interdependence of an economys participants
what is a closed economy?
A closed economy is one where there is no international trade relations with other countries. a closed economy therefore excludes the foreign sector as an economic participant.
what is a open economy?
An open economy is one where there are international trade relations with other countries, An open economy therefore includes the foreign sector as a economic participant.
is the financial sector a economic participant?
no, although not an economic participant, it plays a significant role within the circular flow because it has a relationship with all the economic participants.
what does the solid line represent in the circular flow model?
real flow
what is real flow?
real flow occur when goods and services are traded with economic participants.
‘buy and sell’
what does the dashed line represent in the circular flow model?
money flow
what is money flow?
money flow occur when money is earned or paid between the economic participants.
‘receive and earn income’
what is the relationship between real flows and money flows in an economy
for every real flow there is a money flow that moves in the opposite direction.
who are the four economic participants?
- Households
- Businesses
- The government
- Foreign sector
who buy the factors of production and use the to produce goods and services?
Businesses
who are the primary economic participants who are the owners of the factors of production?
Households
who is made up of households, businesses and governments outside of the country?
Foreign Sector
who owns, produces, allocates and supplies certain public goods and services to its citizens.
The government
Name 2 characteristics of the Households?
- Households own the factors of production, namely capital, entrepreneurship, lan and labour.
- They sell their factors of production on the factor market and, in return, earn interest, profit, rent, and salaries/wages.
- They then use this income (remuneration) to buy goods and services from business to satisfy their needs and wants.
- Households decide what goods and services to buy, where and how to buy them.
Name 2 characteristics of the businesses?
- Businesses purchase the factor of production from households on the factor market.
- They use these factors of production to produce goods and services which are sold in the product market.
- Businesses decide what goods and services to produce as well as where and how to sell them.
- in return, businesses earn revenue/income from the economic participants.
Name 2 characteristics of the government?
- The government is both a producer and a consumer.
- it is a producer because it provides public goods and services, e.g. hospitals and schools
- The government pays for all its expenditure from taxes paid by households and businesses.
- The government plays an essential function in the circular flow, as t provides public goods and services that the private sector is not prepared to provide to the economy.
Name 2 characteristics of the foreign sector?
- The flow of imports and exports between countries leads to the foreign exchange market.
- Exports income is earned when business sell goods and services to foreign markets; this money enters the circular flow and is considered an injection into the economy.
- Imports expenditure is incurred when businesses buy goods and services from foreign markets; this money leaves the circular flow and its considered a leakage from the circular flow.
- The foreign sector plays a significant role in the circular flow as it creates a platform for international trade.
What is the role of the financial sector in the circular flow?
- The financial sector is not directly involved in the production of goods and services.
- it acts as a link between households and businesses who have surplus income and other participants who require finance.
- when households choose to save their income rather than spend it, the savings do not flow into the circular flow but into the financial sector instead.
- financial institutions use these savings to offer loans to new or existing businesses.
what is it called when money that leaves the circular flow? also know as an ‘outflow’ of money from the economy.
Leakage
what’s the effect of leakages?
leakages decrease the amount of money available in the circular flow. al economies strive to decrease the number of leakages from the circular flow.
what form does leakages occur?
- Savings (S)
- Taxes (T)
- Imports (M)
What equation is used to calculate leakages?
L = S + T + M
