Circular Flow Of Income

Question 1

National Output

Answer 1

The total value of output produced by firms.

Question 2

National Income. (profit, dividends, income, wages, rent)

Answer 2

This is the total income received by people in the economy. For example, firms have to pay workers to produce the output. Therefore income flows from firms to households.

Question 3

National Expenditure

Answer 3

Total amount spent on goods and services. For example, with wages from work, households can then buy goods produced by firms. Therefore, the spending goes back to firms.

Question 4

Withdrawals (W) into Circular Flow of Income

Answer 4

Savings (S)

Imports (M)

Taxes (T)

Question 5

Injections (J) into Circular Flow of Income

Answer 5

Investment (I)

Exports (X).

Government spending (G).

Question 6

circular flow of income

Answer 6

The circular flow of income shows the flow of money from economic activity between households and firms. Households receive payments for their services (income) and use this money to buy the output of firms (consumption).

Question 7

leakages

Answer 7

increases in savings, taxes or imports so reducing the circular flow of income and leading to a multiplied contraction of production (output).

Question 8

Injection

Answer 8

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

Question 9

When is the economy in equilibrium

Answer 9

when the rate of injections = the rate of withdrawals

Question 10

aggregate supply

Answer 10

the total supply of goods and services available to a particular market from producers.

Question 11

aggregate demand

Answer 11

the total demand for final goods and services in an economy at a given time.

Question 12

Households in the circular flow of income

Answer 12

Households receive payments (income) for hiring out their services (eg labour) and
then buy the output of firms (consumption)

Question 13

Firms in the circular flow of income

Answer 13

Firms hire land labour and capital (resources) owned by households to produce goods and services (products) for which they pay wages rent etc (income). Firms receive payment (consumption) when products are sold.

Question 14

Assumptions of the simple circular flow of income

Answer 14

• There are only two sectors in the economy; households and firms
• Households spend all of their income on goods and services
• Households own all of their resources
• Always in equilibrium

Question 15

Why are imports seen as leakages and exports seen as injections

Answer 15

Imports are seen as a leakage as they stimulate economic activity in other countries. Exports are seen as an injection as they stimulate economic activity in the domestic economy.

Question 16

What is the role of households?

Answer 16

Households own a factor services which, In a market economy, they hire out to firms.

Question 17

What is a firm? And, what do they do?

Answer 17

firm is an organisation that hires and organises resources to make products

Question 18

what are the rewards of the factor of production

Answer 18

1) Land receives rent
2) human capital receives a wage, real capital receives a rate of return
3) enterprise receives a profit
4) Members of households pay for goods and services they consume with the income they receive from selling their factor in the relevant market.

Question 19

What is national income?

Answer 19

the total amount of money earned within a country.

Question 20

How does the multiplier work?

Answer 20

The multiplier effect comes about because injections of new demand for goods and services into the circular flow of income stimulate further rounds of spending - in other words “one person’s spending is another’s income”

Question 21

Wealth

Answer 21

The stock of assets which have value at a point in time

Question 22

National income

Answer 22

The flow of new output produced by the economy in a particular period

Question 23

Consumption

Answer 23

Total planned spending by households on consumer goods and services produced within an economy

Question 24

Savings

Answer 24

Income which is not spent

Question 25

Investment

Answer 25

Total planned spending by firms on capital goods produced within the economy

Question 26

What causes the equilibrium level of national income to fall

Answer 26

S+M+T > I + G + X

Question 27

What causes the equilibrium level of national income to rise

Answer 27

S + T + M < I + G + X

Question 28

Multiplier effect

Answer 28

The relationship between an initial change in aggregate demand and a larger change in national income

Question 29

GDP

Answer 29

The sum of all goods and services or the value of output produced in the economy over a period of time