Circular Flow of Income Flashcards
Circular Flow of Income
The flow of national output, income and expenditure between households and firms
National Income
The money paid to the households by firms for FoP (CELL)
Total income earned in the economy
National Expenditure
The money spent by households on the goods and services created by firms
Total level of spending in an economy
National Output
All the goods and services produced in a country in a year
Injection
Where money flows into the circular flow of income in the form of exports, investment and government spending
GIX
Withdrawals / Leakages
Where money flows out of the circular flow of income in the form of savings, taxes and imports
TMS
Closed Economy
An economy with no foreign trade
Open Economy
An economy with foreign trade
Aggregate Demand
The total demand, or total planned spending, in an economy at a given price level over a given period of time
AD = C + I + G + (X - M)
Consumption + Imports + Gov. Spending + (Exports - Imports)
Aggregate Supply
The total level of planned production of goods and services produced in the economy over a period of time
Injections Decrease
National Income decreases
Injections Increase
National Income increases
Leakages decrease
National Income increases
Leakages increase
National Income decreases
Three ways to measure GDP
National Output
National Income
National Expenditure
GNI
Gross National Income
The total value of goods and services produced by a country’s FoP, regardless of location
GDP + net property income from abroad
NNI
Net National Income
GNI - level of depreciation
Nominal GDP
The value of this year’s output at current prices
Real GDP
GDP adjusted for changes in the price level
GDP at constant prices
Green GDP
Takes environmental costs of production into consideration
Why we measure National Income
It helps academic economists build models
Helpful for making comparisons over time and against other countries
Make judgements on standard of living
Allows governments and firms to forecast changes in the economy and deciding on the policy
Limitations of National Income Data
S - shadow economy
P - per capita
I - inequality of income
C - cost of living
E - exchange rate
P - political party factors
A - accuracy
W - wealth
S - social costs
