Circular flow of incomes Flashcards
What is a barter economy and what does it require
Barter economy - one without money which requires a “double coincidence of wants”
What does money allow for and what does it create
Money allows for value equivalents and creates aggregates for total economy activity
Define the circular flow
Closed system where individual incomings equals outgoings
It has no leakages or injections
Who was Francis Quesnay and what did his circular flow consist of
Quesnay was a French economist from 1694-1774 and split French society into three classes: the landlords, artisans and farmers
In Quesnay’s circular flow what role do the landlords play
They buy luxury goods from the artisans and food from the farms and receive rent from the farmers
In Quesnay’s circular flow what role do the artisans play
They provide luxury goods to the landlords and industrial goods to the farmers and get foods from the farmers
In Quesnay’ circular flow what role do the farmers play
They provide food to both other classes and pay the artisans for industrial goods and the landlords rent
What are the weaknesses and strengths of Quesnay’s circular flow
Strength - reflects the role of agriculture in French economy at the time
Weaknesses - rejected by classics like Marx as it describes a stagnant economy and only has three classes of people
Describe the modern circular flow diagram
Consists of households paying for goods and services provided by firms using their income
If savings and investment are added to the modern circular flow how must it be amended
A third party known as capital formations must also be included but the system is still a closed flow if S is equal to I
If the government sector is removed then what are the formulae for household incomes, firms outputs and savings and investments
Household incomes Y = C + S
Firms outputs Y = C + I
S = I
What role does the government play in the circular flow
They receive taxes from households and firms and provide benefits to households and subsidies to firms
They also save some for gross investments into infrastructure of the nation
