Circular Flow Of Income

Question 1

What is the circular flow of income?

Answer 1

A diagram showing how income moves around a economy. A simplified way of modelling the economy.

Question 2

What happens in the circular flow of income?

Answer 2

Each of the four factors of production receive a income when it is used in production, received by the owner of that factor.

Question 3

What are the factors of prodcution?

Answer 3

Land, Labour, Capital, Enterprise

Question 4

What is the reward for each factor of production?

Answer 4

Land - Rent
Labour - Wages
Capital - Interest
Enterprise - Profit

Question 5

What is the SCFM?

Answer 5

Simple Circular Flow Model

Question 6

What are the sectors in Simple Circular Flow Model?

Answer 6

Household
Firms

Question 7

What does the household sector do?

Answer 7

Buy the nation’s output and own the factors of production

Question 8

What does the firms sector do?

Answer 8

Hire the factors of production and produce the nation’s output

Question 9

What is the economy in a simplified model always in?

Answer 9

Equilibrium

Question 10

What is equilibrium?

Answer 10

A state of balance

Question 11

How is the economy in equilibrium?

Answer 11

All of the income that is received by households is spent on goods and services - It flows around the economy.

Question 12

What do households give to firms?

Answer 12

Factors of Production
Consumer Spending

Question 13

What do firms give to households?

Answer 13

Goods and Services
Profit, Rent, Interest and Wages

Question 14

Income =

Answer 14

Output = Expenditure

Question 15

Why does income = output = expenditure?

Answer 15

Household expenditure is £100
Therefore output (GDP) is £100
National Income must also be £100

Question 16

Why is the fifth sector model used?

Answer 16

More realistic

Question 17

Why is the fifth sector model more realistic?

Answer 17

Not all income received by households is spent on domestic goods and services.

Question 18

What do households do in reality?

Answer 18

Saved
Paid in taxes
Spent of foreign goods

Question 19

What does a more realistic circular flow model include?

Answer 19

The banking sector
International trade
The government

Question 20

What do households give out?

Answer 20

Taxes - Government
Savings - Banks
Import Spending - International Trade
Consumption - Firms

Question 21

What do governments give out?

Answer 21

Gov spending - Firms

Question 22

What does the banking sector give out?

Answer 22

Investment - Firms

Question 23

What do international trade give out?

Answer 23

Export Revenue - Firms

Question 24

What do firms give out?

Answer 24

Rent
Wages
Interest
Profit

To households

Question 25

What are leakages or whithdrawls?

Answer 25

Any money not passed on in the circular flow of income to purchase domestic goods and services.

Question 26

What are examples of leakages?

Answer 26

Saving
Taxes
Import Spending

Question 27

What is an injection?

Answer 27

Money flowing into the economy that has originated from outside the circular flow.

Question 28

What is an example of injections?

Answer 28

Investment
Exports
Government Spending

Question 29

When will there be equilibrium in the economy?

Answer 29

Sum of Injections = Sum of withdraws

Question 30

What is the equation for equilibrium in the economy?

Answer 30

Investment + Government Spending + Exports = Savings + Taxes + Imports

Question 31

Why can an economy be in disequilibrium?

Answer 31

Because there are injections and leakages there is no guarantee that the economy will remain in equilibrium

Question 34

National Income =

Answer 34

National Output = National Product