Circular flow of Income

Question 1

Income

Answer 1

Income is the flow of money received by a person or economy each year.

Question 2

Wealth

Answer 2

Wealth is the sum, or stock, of a person or economy’s assets.

Question 3

Assets

Answer 3

Items that you own.

Question 4

Circular Flow Equation

Answer 4

National income = national expenditure = national output

Question 5

Factor Incomes

Answer 5

Money paid by firms to households in return for factors of production.

Question 6

Real GDP

Answer 6

Real Gross Domestic Product.

Real GDP measures an economy’s national output: how many goods and services the economy produces in a year.

Question 7

Leakages/Withdrawals

Answer 7

A leakage (also known as a withdrawal) is when money leaks out of the circular flow.

Question 8

Types of leakage/withdrawal

Answer 8

SIT
Savings
Imports
Taxes

Question 9

Savings

Answer 9

Disposable income that is not spent by households. Savings are a leakage.

Question 10

Imports

Answer 10

Spending on foreign goods and services. Imports are a leakage.

Question 11

Taxes

Answer 11

Money paid to the government by consumers, firms and workers. Taxes are a leakage.

Question 12

Injections

Answer 12

An injection is when money is injected into the circular flow.

Question 13

Types of injection

Answer 13

GIX
Government spending
Investment
EXports

Question 14

Government spending

Answer 14

When the government injects money into the economy by spending on schools, teachers, hospitals, doctors etc.

Question 15

Exports

Answer 15

When firms exports goods abroad, foreign consumers pay us, so money is injected into our economy.

Question 16

Investment

Answer 16

Banks use our savings to invest back into our firms, injecting money into the circular flow.