Circular-Flow Model

Question 1

the study of the economy as a whole, where economists study aggregates/totals

Answer 1

Macroeconomics

Question 2

What is the circular flow model?

Answer 2

the circular flow model is a simplified economic model that describes the interdependence of an economys participants

Question 3

what is a closed economy?

Answer 3

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.

Question 4

what is a open economy?

Answer 4

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.

Question 5

is the financial sector a economic participant?

Answer 5

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.

Question 6

what does the solid line represent in the circular flow model?

Answer 6

real flow

Question 7

what is real flow?

Answer 7

real flow occur when goods and services are traded with economic participants.

‘buy and sell’

Question 8

what does the dashed line represent in the circular flow model?

Answer 8

money flow

Question 9

what is money flow?

Answer 9

money flow occur when money is earned or paid between the economic participants.

‘receive and earn income’

Question 10

what is the relationship between real flows and money flows in an economy

Answer 10

for every real flow there is a money flow that moves in the opposite direction.

Question 11

who are the four economic participants?

Answer 11

• Households
• Businesses
• The government
• Foreign sector

Question 12

who buy the factors of production and use the to produce goods and services?

Answer 12

Businesses

Question 13

who are the primary economic participants who are the owners of the factors of production?

Answer 13

Households

Question 14

who is made up of households, businesses and governments outside of the country?

Answer 14

Foreign Sector

Question 15

who owns, produces, allocates and supplies certain public goods and services to its citizens.

Answer 15

The government

Question 16

Name 2 characteristics of the Households?

Answer 16

• 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.

Question 17

Name 2 characteristics of the businesses?

Answer 17

• 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.

Question 18

Name 2 characteristics of the government?

Answer 18

• 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.

Question 19

Name 2 characteristics of the foreign sector?

Answer 19

• 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.

Question 20

What is the role of the financial sector in the circular flow?

Answer 20

• 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.

Question 21

what is it called when money that leaves the circular flow? also know as an ‘outflow’ of money from the economy.

Answer 21

Leakage

Question 22

what’s the effect of leakages?

Answer 22

leakages decrease the amount of money available in the circular flow. al economies strive to decrease the number of leakages from the circular flow.

Question 23

what form does leakages occur?

Answer 23

• Savings (S)
• Taxes (T)
• Imports (M)

Question 24

What equation is used to calculate leakages?

Answer 24

L = S + T + M

Question 25

what is it called when money that enters the circular flow? It is also known as an ‘inflow’ of money into the economy.

Answer 25

Injections

Question 26

what’s the effects of injections?

Answer 26

injections increase the amount of money available in the circular flow.all economies strive to increase the number of injections into the circular flow.

Question 27

what form does injections occur?

Answer 27

• Investment (I)
• Government expenditure (G)
• Exports (X)

Question 28

What equation is used to calculate injections?

Answer 28

J = I + G + X

Question 29

when is an economy in equilibrium?

Answer 29

An economy is in equilibrium when leakages are equal to injections. in other words, al money that flows out of the economy is equal to all money that flows into the economy.

L = J

Question 30

The formula to calculate Aggregate income:

Answer 30

Y = C + I + G + (X - M)

Y = Income
C = Consumers
I = Producers
G = Government
X = Exports
M = Imports

Question 31

when is an economy in disequilibrium?

Answer 31

an economy is in disequilibrium when injections are more than leakages or when leakages are more than injections. in other words, there is either more money flowing into the economy than flowing out of the economy. Or, similarly, there is either more money flowing out of the economy tan into the economy.

Question 32

name the four markets that occur within the circular flow:

Answer 32

1 - Goods/Products/output Market
2 - Factor/resources/input market
3 - financial market
4 - foreign exchange market

Question 33

what refers to the value of all final goods and services produced within the borders of a country within a specific period of time.

Answer 33

Gross Domestic Product (GDP)

Question 34

What refers to the value of all final goods and services produced by the permanent residents of the country within a specific period of time.

Answer 34

Gross National Product (GNP)

Question 35

what’s the difference between domestic and national?

Answer 35

whenever economists refer to domestic, they are referring to ‘within the borders’ of the country by all inhabitants. and whenever economist refer to national, they are referring to the permanent citizens, not foreigners.

Question 36

what are the three ways to determine the level of economic activity?

Answer 36

1 - Production method - GDP (P)
2 - Expenditure method - GDP (E)
3 - Income method - GDP (I)

Question 37

what is the production method?

Answer 37

the production method calculates the total value of all final goods and services produced within a country.

Question 38

what is the expenditure method?

Answer 38

the expenditure method calculates the total amount spent on goods and services by households, the government, firms and the foreign sector.

Question 39

what is the income method?

Answer 39

The income method calculates the total amount earned by the owners of the factors of the production within a country.

Question 40

what’s refers to a compulsory pmet levied by the government on a citizen or business in a country?

Answer 40

Taxes

Question 41

what is refers to a financial incentive or benefits received from the government, that reduces the costs of the business.

Answer 41

Subsidy

Question 42

Taxes levied on the final item produced per unit, e.g. VAT and import duties

Answer 42

taxes on products

Question 43

Taxes are not linked to specific goods or services for which the producer is responsible. it is levied on activities during the production process, e.g. tax on land or business licenses.

Answer 43

other taxes on production

Question 44

factor cost

Answer 44

refers to the cost of the factors of production incurred when producing goods and services. Factor cost does not include any taxes or subsidies

Question 45

Basic prices

Answer 45

the price of goods and services after other taxes on production have been added and other subsidies on production have been subtracted

Question 46

Market price

Answer 46

the