Circular Flow Of Income Flashcards
What is national income?
The monetary value of the flow of output produced in an economy over a period of time.
What do households own and how do they use their income?
Households own the productive resources of the nation, which they exchange for rent, wages, interest, and profit; they use the income earned to buy goods and services.
What role do firms play in the economy?
Firms hire resources as inputs to produce output and sell the goods and services produced to households.
How can national income be measured?
National income can be measured as income flows round the economy, so national income = national expenditure = national output.
What is the circular flow model?
The circular flow model illustrates how households earn income by selling their factors of production to firms and use it to purchase goods and services produced by the firms.
What is the financial sector’s role in the circular flow of income?
The financial sector lends income saved to businesses to invest.
How does the government sector affect the circular flow of income?
The government sector takes some income out of the flow as tax, but also spends, injecting income into the flow.
What is the foreign sector’s impact on the circular flow of income?
Some income flows out to other countries when imports are purchased; exports add to the flow of income because income comes in from outside the economy.
What are injections in the circular flow of income?
Injections add money to the circular flow of income, which can lead to economic growth; they include investment (I), government consumption (G), and exports (X).
What are withdrawals in the circular flow of income?
Withdrawals remove money from the circular flow of income, which can lead to economic contraction; they include savings (S), taxation (T), and imports (M).
What is national income equilibrium?
National income equilibrium occurs when planned injections equal planned withdrawals.
What happens if injections exceed withdrawals?
If injections exceed withdrawals, national income rises, indicating economic growth.
What happens if withdrawals exceed injections?
If withdrawals exceed injections, national income falls, indicating economic contraction.
What is the difference between wealth and income?
Wealth is a stock concept representing the value of assets held, while income is a flow of money going to factors of production.
How are wealth and income related?
People with higher incomes can build up their wealth; wealth can generate an extra source of income.
How is wealth distributed compared to income?
Wealth is more unevenly distributed than income.
