Circular Flow Of Income Flashcards
What does the circular flow of income model show?
How money moves through the economy between households and firms
How is income transferred from firms to households / from households to firms?
Firms —-> Households
Wages
Households —-> Firms
Purchasing
Goods/ services
What are the main injections and withdrawals?
Injections
-investments
-government spending
-exports
withdrawals
-savings
-taxes
-imports
What happens to economic activity as money is moved between households and firms more quickly?
There is more economic activity/ economy grows more quickly
What does an increase in injections do to the economy?
An increase in injections speeds up the economy, leading to economic growth
How does gov spending boost economic activity?
Through the creation of public sector jobs (NHS. Nurses) & through the public sector spending in the private sector (NHS buying laptops)
How do investments boost the economy?
Investments = business spending on assets that will generate profit in the future. More spending = economic growth
How do exports boost the economy?
When goods are exported, money is injected into the economy in exchange. More money in the economy means economic growth
How does an increase in withdrawals affect the economy?
An increase in withdrawals slows down the economy, slowing economic growth
How do taxes slow down the economy?
The more businesses and people spend on taxes, the less they have to spend in the circular flow of income
How do savings slow down the economy?
When people save money, it is taken out of the circular flow of income/ is no longer flowing through the economy.
How do imports slow down the economy?
When goods are imported, money is sent out of the economy, leaving less to be spent within the economy
How do you increase economic growth?
decrease withdrawals
-savings (lower IRs)
-imports (make pound weaker against other currencies - foreign goods become more expensive)
-tax(lower coorporation, income, VAT taxes)
Increase Injections
-exports (weaker pound - exports are cheaper to buy in foreign currencies)
-gov spending (increase spending on things like building roads - more jobs created)
-investments (lower IRs, lower corporation tax)
