Circular Flow of Income

Question 1

Circular Flow of Income

Answer 1

The flow of national output, income and expenditure between households and firms

Question 2

National Income

Answer 2

The money paid to the households by firms for FoP (CELL)
Total income earned in the economy

Question 3

National Expenditure

Answer 3

The money spent by households on the goods and services created by firms
Total level of spending in an economy

Question 4

National Output

Answer 4

All the goods and services produced in a country in a year

Question 5

Injection

Answer 5

Where money flows into the circular flow of income in the form of exports, investment and government spending
GIX

Question 6

Withdrawals / Leakages

Answer 6

Where money flows out of the circular flow of income in the form of savings, taxes and imports
TMS

Question 7

Closed Economy

Answer 7

An economy with no foreign trade

Question 8

Open Economy

Answer 8

An economy with foreign trade

Question 9

Aggregate Demand

Answer 9

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)

Question 10

Aggregate Supply

Answer 10

The total level of planned production of goods and services produced in the economy over a period of time

Question 11

Injections Decrease

Answer 11

National Income decreases

Question 12

Injections Increase

Answer 12

National Income increases

Question 13

Leakages decrease

Answer 13

National Income increases

Question 14

Leakages increase

Answer 14

National Income decreases

Question 15

Three ways to measure GDP

Answer 15

National Output
National Income
National Expenditure

Question 16

GNI

Answer 16

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

Question 17

NNI

Answer 17

Net National Income
GNI - level of depreciation

Question 18

Nominal GDP

Answer 18

The value of this year’s output at current prices

Question 19

Real GDP

Answer 19

GDP adjusted for changes in the price level
GDP at constant prices

Question 20

Green GDP

Answer 20

Takes environmental costs of production into consideration

Question 21

Why we measure National Income

Answer 21

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

Question 22

Limitations of National Income Data

Answer 22

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