Circular Flow Of Income

Question 1

Circular flow of income

Answer 1

Circular Flow of Income shows the movement of economic resources and wealth throughout the economy.

It shows how individuals, organisations and the government work together to distribute the economic resources used to produce good and services.

Question 2

Types of economies and what they are

Answer 2

Closed Economy: this is an economy that does not trade with any other country i.e. there are no imports or exports of goods & services.

Open Economy: this is an economy where people and businesses trade goods and services with other countries e.g. Ireland buys oranges from Spain and sells milk to France.

Question 3

Leakages and injections

Answer 3

• However, not all economic resources and income flow directly between households and businesses.

• When households do not spend all their money, their savings create a leak from the circular flow of income.

Banks can lend this money to households, which is then injected back into the economy.

• Some income also leaks from the circular flow as households and businesses pay taxes to the government.

• This money is then injected back into the economy through government spending.

Question 4

Circular flow of income (open economy)

Answer 4

• In an open economy like Ireland, which is heavily involved in international trade (trading with other countries), imports (goods/services coming into
Ireland from other countries) and exports (goods/services leaving Ireland to go to other countries) also impact on the circular flow of income.

• Money spend on imports is leakage from the circular flow because the money leaves Ireland and goes back to the country where the good/service came from.

• Money made from exports injects money back into the economy because money is coming back into Ireland from the goods/services that have been sold abroad.