Circular Flow Of Income Flashcards
What is the circular flow of income?
A diagram showing how income moves around a economy. A simplified way of modelling the economy.
What happens in the circular flow of income?
Each of the four factors of production receive a income when it is used in production, received by the owner of that factor.
What are the factors of prodcution?
Land, Labour, Capital, Enterprise
What is the reward for each factor of production?
Land - Rent
Labour - Wages
Capital - Interest
Enterprise - Profit
What is the SCFM?
Simple Circular Flow Model
What are the sectors in Simple Circular Flow Model?
Household
Firms
What does the household sector do?
Buy the nation’s output and own the factors of production
What does the firms sector do?
Hire the factors of production and produce the nation’s output
What is the economy in a simplified model always in?
Equilibrium
What is equilibrium?
A state of balance
How is the economy in equilibrium?
All of the income that is received by households is spent on goods and services - It flows around the economy.
What do households give to firms?
Factors of Production
Consumer Spending
What do firms give to households?
Goods and Services
Profit, Rent, Interest and Wages
Income =
Output = Expenditure
Why does income = output = expenditure?
Household expenditure is £100
Therefore output (GDP) is £100
National Income must also be £100
Why is the fifth sector model used?
More realistic
Why is the fifth sector model more realistic?
Not all income received by households is spent on domestic goods and services.
What do households do in reality?
Saved
Paid in taxes
Spent of foreign goods
What does a more realistic circular flow model include?
The banking sector
International trade
The government
What do households give out?
Taxes - Government
Savings - Banks
Import Spending - International Trade
Consumption - Firms
What do governments give out?
Gov spending - Firms
What does the banking sector give out?
Investment - Firms
What do international trade give out?
Export Revenue - Firms
What do firms give out?
Rent
Wages
Interest
Profit
To households
What are leakages or whithdrawls?
Any money not passed on in the circular flow of income to purchase domestic goods and services.
What are examples of leakages?
Saving
Taxes
Import Spending
What is an injection?
Money flowing into the economy that has originated from outside the circular flow.
What is an example of injections?
Investment
Exports
Government Spending
When will there be equilibrium in the economy?
Sum of Injections = Sum of withdraws
What is the equation for equilibrium in the economy?
Investment + Government Spending + Exports = Savings + Taxes + Imports
Why can an economy be in disequilibrium?
Because there are injections and leakages there is no guarantee that the economy will remain in equilibrium
National Income =
National Output = National Product
