Circular flow of income Flashcards
What is the Circular Flow of Income? It is a model that shows how income circulates in the economy.
What are the main participants in a simple circular flow model? Households and firms are the main participants in a simple economy.
How do households contribute to the Circular Flow of Income? Households supply factors of production (land
labor
How do firms contribute to the Circular Flow of Income? Firms produce goods and services and pay factor incomes (wages
rent
What is a closed economy in the context of the Circular Flow of Income? A closed economy has no government intervention or foreign trade and assumes that households spend all their income and firms pay out all earnings.
What are injections in the Circular Flow of Income? Injections are non-consumer spending additions
including investment by firms
What are withdrawals (leakages) in the Circular Flow of Income? Withdrawals are funds leaving the circular flow
including savings
How does saving affect the Circular Flow of Income? Savings withdraw money from the circular flow
potentially reducing economic activity if too much income is saved.
What are the three main types of injections? 1) Investment by firms
2) Government spending
What are the three main types of withdrawals? 1) Savings by households
2) Imports
What is the physical flow in the Circular Flow of Income? Physical flow refers to the movement of goods and services between firms and households.
What is the monetary flow in the Circular Flow of Income? Monetary flow refers to money payments from households to firms for goods and services and from firms to households for resources.
How do imports function as a withdrawal in the Circular Flow of Income? Imports represent money spent by residents on foreign goods and services
removing it from the domestic economy.
How do exports function as an injection in the Circular Flow of Income? Exports bring money into the domestic economy through spending by foreign firms and individuals.
What are criticisms of the Circular Flow Model? Criticisms include overreliance on government intervention and the potential for increased inflation without a matching rise in output.
