Circular Flow Of Income Flashcards
What is the circular flow of income?
A basic model that illustrates how money moves within an economy. It is the continuous movement of income and expenditure between various sectors of the economy. The model held understand how different sectors are interconnected and interdependent.
What are the different sectors of the economy?
Households, firms, the government, banks and the external sector.
What are the two primary types of flows?
Goods markets- where households demand product to which firms supply by exchanging them for money (consumer expenditure).
Factors market- where firms demand factors of production to which households supply by exchanging them for income (wages, interest)
What are the 2 types of circular flow models?
Simplified - 2 sector model with only household and firms as participants. It captures essential interactions between these sectors.
Expanded- where more participants involved, households, firms, the government, financial institutions and foreign trade are considered.
What the the sectors do in an expanded model?
Financial institutions- facilitate savings and investments. Providing loans for firms and the government.
Government- collects taxes from household and firms, then uses the revenue to provide public goods and services.
Foreign sector- selling products to foreign buyers, money flows into the domestic economy. Other way around for importing products.
What are withdrawals?
Any outflows of money from the economic system that reduce the level of income circulating in the economy.
What are injections?
Refer to any additions of income into the economic system that increases the overall level of circulating income.
Why is this model important?
It can help the government and central banks adjust monetary and fiscal policies, that overall promotes economic growth.
It can evaluate economic growth and analyse economic stability.
That are the key assumptions?
Simple model assumes a closed economy with foreign trade. Whereas expanded assumes an open economy.
Assumes that the economy is operating in near or full employment.
