Circular Flow of Income Flashcards
What are the 3 methods in calculating national income?
1) expenditure method
2) income method
3) the output method
what is the expenditure method?
GDP = C+I+G+(X-M)
What is the income method?
GDP is the sum of 4 different types of incomes earned through the production of goods and services
what is the output method?
this is where the value added by each enterprise in the production of goods and service is measure
what do the circular flow of incomes and spending show?
the circular flow of incomes and spending shows the connections between the different sectors in the economy
what does circular flow of income show?
shows the flows of goods and services and factors of production between firms and households
what pattern does the circular flow of income follow?
Production –> Income –> Expenditure –> Production
What are physical flows?
These are movements of goods, services and labour
what are monetary flows?
movement of money in return for the physical flow
Why don’t all incomes flow directly to a business?
due to withdrawals and leakages
what sort of leakages may there be?
- taxation
- money may be put aside for savings
- money may be spent on imports
what are withdrawals and what may they do to the circular flow of income?
withdrawals are increases in savings, taxes and imports so reduce the circular flow of income
what are injections into the circular flow?
these are additions to investment, government spending or exports so they boost the circular flow of income.
When is an economy in equilibrium
rate of injections = the rate of withdrawals
