Circular Flow Of Income

Question 1

What is an economy made up of?

Answer 1

Economy is made up of firms and households

Question 2

How do firms and households interact in the economy?

Answer 2

Firms and households interact and exchange resources in an economy.

Question 3

What do firms do?

Answer 3

• Firms produce goods and services, and all of these goods and services make up the national output.
• Firms supply goods and services to households

Question 4

What do households do?

Answer 4

• Households provide labour, land and capital that firms use to produce the national output.
• Households supply firms with the factors of production, such as labour and capital, in return they receive wages and dividends.

Question 5

What is national income?

Answer 5

Money paid to households by firms for factors of production.

Question 6

What do households do with national income?

Answer 6

Households spend the money that they get from national income on goods and services that firms create.

Question 7

What is national expenditure?

Answer 7

Value of spending by households on goods and services.

Question 8

What is the formula for national expenditure?

Answer 8

AT FULL EMPLOYMENT:

National output = national income = national expenditure

Question 9

How does spending/income circulate around an economy?

Answer 9

Spending/Income will circulate around the economy in the circular flow of income.

Question 10

What is a physical flow?

Answer 10

Flow of real goods,services, land, labour and capital.

Question 11

What is monetary flow?

Answer 11

Flow of money, which can be via taxes, or consumption, this is money that pays for physical things.

Question 12

What does the circular flow suggest?

Answer 12

As long as households keep spending what they earn, and firms keep using their revenues to produce more goods using the same inputs, then national output, and national income will not change.

Question 13

What is an economies’ circular flow of income affected by?

Answer 13

• Injections

* Leakages

Question 14

What is an example of a leakage?

Answer 14

Savings
• Savings removes income from the circular flow
Taxes
• Taxes are a withdrawal of income from the circular flow of income

Question 15

What are some examples of injections?

Answer 15

• Exports
• Government spending
• Investment

Question 16

What are the different leakages?

Answer 16

• Savings
• Imports
• Taxes

Question 17

Who can withdrawals be made by?

Answer 17

Households and firms.

Question 18

What is meant by the circular flow of income?

Answer 18

• The circular flow of income is a neoclassical economic model depicting how money flows through the economy. In its simplest version, the economy is modelled as consisting only of households and firms. Money flows to workers in the form of wages, and money flows back to firms in exchange for products.
• The circular flow of income shows connections between different sectors of our economic system. It revolves around flows of goods and services and factors of production between firms and households.

Question 19

What is meant by a leakage?

Answer 19

• Leakage is a situation in which capital, or income, exits an economy or system rather than remaining within it.
• In economics, leakage refers to outflow from a circular flow of income model.

Question 20

What is meant by an injection into the circular flow?

Answer 20

Injections into the circular flow are additions to investment, government spending or exports so boosting the circular flow of income leading to a multiplied expansion of output.