Circular Flow of Income Flashcards
What is the circular flow of income?
The movement of expenditure and income around an economy between households and firms from goods and services produced.
What is consumer expenditure?
Household income spent of goods and services provided by firms.
What are factor incomes?
The reward for providing factors of production.
What are the 4 factors of production?
Capital
Enterprise
Land
Labour
What are the incomes from each factor?
Capital = interest
Enterprise = profit
Land = rent
Labour = wages/salaries
What are withdrawals or leakages from the circular flow?
Incomes that aren’t spent by households in the economy.
What are the 3 withdrawals/leakages?
Taxation (T)
Savings (S)
Import Expenditure (M)
What are injections into the circular flow?
Other expenditure spent on goods and services in the economy.
What are the 3 injections?
Government expenditure (G)
Investment (I)
Exports Revenues (X)
What is investment?
Expenditure by firms on capital goods to improve productivity.
How can injections and withdrawals show economic growth?
I + G + X > S + T + M - economy if growing
I + G + X < S + T + M - economy is shrinking
I + G + X = S + T + M - no growth
What are the 3 methods of measuring GDP growth?
The output method
The income method
The expenditure method
What is the output method?
Final value of all good and services produced in an economy in a year.
What is the income method?
Sum of all factor incomes earned in an economy in a year.
What is the expenditure method?
Total expenditure on goods and services in an economy in a year.
C + I + G + (X-M)
