Circular Flow Of Income

Question 1

What is circular flow of income

C f o i s t m o e r a w thr ou t e

Answer 1

Circular Flow of Income shows the movement of economic resources and wealth throughout the economy.

Question 2

What are the 2 types of economies

Answer 2

Closed Economy
Open economy

Question 3

What is a closed economy

Answer 3

this is an economy that does not trade with any other country i.e. there are no imports or exports of goods & services

Question 4

What is an open economy

Answer 4

this is an economy where people and businesses trade goods and services with other countries e.g. Ireland buys oranges from Spain and sells milk to France.

Question 5

Explain Circular flow on income (simple economy)

Answer 5

In a simple economy, households provide businesses with the 4 factors of production. In return for these resources, businesses pay households a reward. Businesses use these factors to produce goods and services, which they sell to households. Households in turn spend money on the goods and services produced by firms. This money is then used by firms to pay households for their work. This process repeats itself and creates a circular flow of income in the economy.

Question 6

Leakages and injections

W h-h d n s a t m, t s c a L f t c f o i

B c L t m t h-h, w i t i b i t e

Answer 6

● When households do not spend all their money, their savings create a leak
from the circular flow of income.
● Banks can lend this money to households, which is then injected back into
the economy.

Question 7

Circular flow of income (open economy) leakages and injections

Answer 7

● Money spend on imports is leakage from the circular flow because the money
leaves Ireland and goes back to the country where the good/service came
from.
● Money made from exports injects money back into the economy because
money is coming back into Ireland from the goods/services that have been
sold abroad.