circular flow of income Flashcards
What are the 2 things that households provide firms
Consumer expenditure
Factor services eg. labour
What are the 2 things that firms provide households
goods and services
income
Give 3 examples of injections
- Gov spending - new school creates jobs, households recieve income
- Exports higher exports increase revenue for firms
- Foreign investment - When a company outside the UK invests/builds a factory in the UK. Households income increase as more jobs created.
Give 3 examples of withdrawals
- Taxes
- Imports - money taken from Uk firms and sent abroad to other firms. OR money taken from UK consumers and sent abroad to foreign firms/non domestic firm.
- Savings
What is the injection effect if government spending increases.
If gov spending increases then…
-positives
+ More jobs created, increasing household incomes. More grants to firms so firms increase revenue.
-Negatives
Gov may spend more on welfare benefits so less workers for firms as workers fall in unemployment trap. Thererefore firms revenue decreases as less output.
Inflation increases as more demand
What is the injection effect if exports increase.
revenue for UK firms increase
More jobs created so household incomes increase
Negatives
- There are less resources for UK so less consumer goods, so less expenditure by Uk consumers so less revenue for other UK firms.
- Inflation rises as more demand as less goods.
What is the injection effect if Foreign investments increases to the UK.
better relations with other countries.
Less unemployment
Negatives
1. Cash is flowing out of firms to other countries.
2. Infant industry arguement
What is infant industry arguement
When non uk firms carry out foreign investment to the UK, causing Uk firms to have more competition. Small firms struggle to compete so they may leave market.
What is the withdrawal effect when Tax increases
Positives
- More budget for UK gov
- Lower income inequality
- Lower inflation
negatives
1. less households income
2. Less profits for firms
3. Less incentive to work
What is the withdrawal effect when Imports increase
Positives
- Governement budget increase as more tarrifs collected from imports
- Consumer sovereignty increases as more choice for consumers
Negatives
1.Net trade decreases so AD falls
2. Higher unemployment
3. Lower growth
What is the withdrawal effect when savings rise
Positives
1.Inflation decreases
2. Less imports so BOP improved
Negatives
1. Less revenue for UK firms so less profit
2. lower growth
What is difference between income and wealth
Income is money recieved by factors of production and wealth is a stock of assets, that is purchased by investor with intention that it may rise in value in future.
