Circular Flow Of Income

Question 1

What is an open economy?

Answer 1

An open economy is one in which there is foreign trade

Question 2

What is a closed economy?

Answer 2

A closed economy is one in which there is no foreign trade

Question 3

What is the circular flow of income?

Answer 3

The circular flow model demonstrates how money moves from producers to households and back again in an endless loop. In an economy, money moves from producers to workers as wages and then back from workers to producers as workers spend money on products and services.

Question 4

What are the 3 ways of measuring the level of economic activity?

Answer 4

National output - value of the flow of goods and services from firms and households

National expenditure - The value of spending by households on goods and services

National income - The value of income paid by firms to households in return for land, labour and capital

Question 5

What is aggregate demand

Answer 5

It is the total demand for goods and services in an economy at a given time

Question 6

What is the equation for aggregate demand

Answer 6

• Consumer expenditure + Investment + Government expenditure + (exports-imports)
• C + I + G + (X-M)

Question 7

What is wealth?

Answer 7

Wealth is the value of a stock of assets owned by someone
- savings in bank accounts
- ownership of real estate
- shares / stocks in a business

Question 8

What is income

Answer 8

• Income is the flow of money going to factors of production
  
  • Wages and salaries
  • Rental income from property
  • Interest from savings

Question 9

What is the Gina coefficient?

Answer 9

• The gini coefficient is commonly used to measure income inequality, ranges from 0 to 1.
• The higher the number, the greater the degree of income inequality

Question 10

What is an injection?

Answer 10

An injection into the circular flow is a monetary addition to the economy

Question 11

How could you remember the injections?

Answer 11

IGE
Investment
Government expenditure
Exports

Question 12

What are the 3 injections?

Answer 12

Investment - Spending by firms on new capital equipment like factories, offices and machinery
Government spending - Spending by central, local and other government agencies
Exports - Spending by foreigners on goods and services made in the UK

Question 13

What is a withdrawal?

Answer 13

A withdrawal from the circular flow is money that is removed from the economy

Question 14

How could you remember the withdrawls?

Answer 14

STI
Savings
Taxes
Imports

Question 15

What are the 3 withdrawls?

Answer 15

Saving by households/firms - Money which is saved and not spent
Taxes paid to the government- Taxes take money from both households and firms
Imports - Goods and services that are bough from abroad by both households and firms

Question 16

What happens when injections are larger than withdrawls?

Answer 16

A rise in national income which would then lead to higher spending

Question 17

What happens when withdrawls are larger than injections?

Answer 17

A fall in national income which would then lead to less spending