circular flow of income Flashcards
what is macroeconomics?
looking at the behaviour of economics agents on a global scale, government and firms
what is a Firm?
unit of production that uses factor services to produce goods and services
What is a Household?
Unit of consumers who supply factor services
What is the Circular flow of income
A simplified model of the economy that shows the movement of goods and services between households and firms
What is a Closed System?
Ignores the Government
No international trade
Give Four main flows
1) Households supply factor services to firms
2) Firms give factor incomes to households In return for factor services
3) Output of goods and services flow from firms to households in the form of consumer goods
4) Households pay for the goods and services from firms (consumer expenditure)
Give 3 Leakages and their symbols
Imports (M) = expenditure from households on foreign goods
Tax (T) = Money raised by Gov to finance its spending
Savings (S) = Money saved by households
Give 3 Injections and their symbols
Export (X) = Expenditure by foreign households on home goods and services
Gov expenditure (G) = expenditure by Gov
Investment (I) = expenditure undertaken by firms to add to capital stock
3 methods of measuring national income
GDP = Measure of the total value of national output produced in an economy in a given time period (excludes citizens abroad)
GNP = Measure total value of all products and services created by a country’s citizens regardless of location
GDP per capita = Measure of countries economic output per person
Give 3 ways to calculate GDP
Output method = value added from each of the main economic sectors
Expenditure method = adding up total final expenditure.
GDP/AD = C+I+G+(X-M)
Income method = Adding up total final income paid to the factors of production
Problems in measuring GDP
- Double counting
- Black market / hidden economy
- Inaccurate data
What is Aggregate Demand?
Total spending in an economy over a given period of time
What is consumption?
Total amount spent by households on goods and services
Formula of Aggregate Demand
AD = C+I+G+(X-M)
6 factors that influence consumption
Disposable income
wealth effects (market value of all assests owned by a household)
Rate of interest
consumer confidence
Tax
Unemployment
