Circular Flow Of Income

Question 1

What is the process of the circular flow of income

Answer 1

1)Firms produce goods and services, and all of these - goods and services make up the national output.
2)The households in a country provide the labour, land and capital that firms use to produce the national output. The money paid to households by firms for these factors of production is the national income.
3)Households spend the money they get from the national income on the goods and services (outputs) that firms create — the value of this spending is the national expenditure.

Question 2

What’s the formula four circular flow of income

Answer 2

National output = National income = National expenditure

Question 3

What is a physical and monetary flow

Answer 3

• A physical flow of ‘real things’ — i.e. goods, services, labour, land and capital.
• A monetary flow — i.e. the money that pays for the ‘physical things’.

Question 4

What are injections and withdrawals

Answer 4

Injections into the circular flow of income come in ‘ the form of exports, investment and government spending — these go directly to firms.
Withdrawals come in the form of imports, savings and taxes — these withdrawals can be made by households or firms.

Question 5

When will firms output increase

Answer 5

If injections into the circular flow are greater than withdrawals, this means that expenditure is greater than output

Question 6

What is the result of forms output increasing

Answer 6

national output, income and expenditure will all increase.

Question 7

When will firms reduce output and what will this cause

Answer 7

If withdrawals from the circular flow are greater than injections, this means that output is greater than expenditure

As a result national output, income and expenditure will decrease

Question 8

What is the multiplier affect

Answer 8

When an injection is made into the circular flow, the actual change in the national income is greater than the initial injection

Question 9

What does the size of the multiplier effect depend on

Answer 9

The rate at which money leaks from the circular flow of income so a big leakage will mean the quicker the money leaves the circular flow of income and the smaller the multiplier affect

Question 10

How is wealth different to income

Answer 10

• Wealth is the total value of all the assets owned by individuals or firms in an economy and is a stock concept so like a stockpile of resources

These resources aren’t currently being used in the circular flow of income, but they could be at some point.