circular flow of income Flashcards
definition of circular flow of income
the movement of spending and income throughout the economy
what does the simplified model consist of
households spending on goods and services from firms, and firms giving goods and services in return. Households give factor services (land, labour, capital and enterprise) for firms to use to make goods and services and in return get factor payments which they spend on those goods and services.
what are the limitations of the simplified model
it shows a closed economy which doesn’t really exist. it here is always foreign trade and government intervention.
what does the open economy model depict
injections into expenditure (E) which is spent on goods and services aka output (O) which generate income (Y) for workers, then the cycle repeats or we then leak this money out of the economy
injections into an economy
investment by firms into additional capital stock (I)
exports (x)
government spending (G) transfer payments (benefits) or public sector
leakages out of an economy
leak via income
savings (S)
Imports (m)
Taxes (T)
if injections> leakages
economy grows, inflation, more jobs, less unemployment
if leakages >injections
economy shrinks, deflation, less jobs and higher unemployment
relationship between output, income and expenditure
output=income=expenditure
because output (the value of what we buy) must equal the value of what we spend (expenditure) which must equal the value of what we earn (income)
unit of national income ?
gross domestic product- the value of all the goods and services produced by factors of production based in a country during a particular year
how do we measure GDP
taking the quantities of all good and services produced multiplying them by their prices and summing the total
what 3 ways can we measure GDP if O=E=Y
output measure - value of all hood and services produced
expenditure measure-value of all goods and services purchased by households and government including exports-imports
income measure- profits and wages
