Economic Flows Flashcards
The Circular Flow of Income
shows the relationship between sectors in the Australian economy and assists in forecasting changes in economic activity.
5 Sectors
household, business, financial, government and foreign.
S
savings
T
taxation
M
imports
I
investment expenditure
G
government expenditure
X
exports
Y
income
C
consumption expenditure
Aggregate Demand
the total expenditure on goods and services produced in an economy in a period of time. C + I + G + (X - M)
Aggregate Supply
the total quantity of goods and services that producers in an economy are willing and able to produce over a specific period of time.
Consumption Expenditure
the total expenditure on goods and services by the household sector
Government Expenditure
refers to the total amount of money spent by a government.
Income
payments to the households in the form of wages, rent, interest and profit.
Imports
goods and services purchased by a country from other nations.
Exports
goods and services produced within a country and sold to other nations.
Gross Domestic Product (GDP)
a measure or the market value of goods and services produced and sold in an economy in a given period of time. C + I + G + X
Investment
the spending by businesses or individuals on capital goods to enhance production capacity leading to future profit.
Subsides
are financial assistance provided by the government sector to businesses or households, aimed at lowering the cost of goods and services.
Taxation
money collected by the government sector from households and businesses
Savings
the portion of income that households and businesses set aside instead of spending
Leakage
an outflow of expenditure from the circular flow of income
Injections
an outflow of expenditure into the circular flow of income
Equilibrium
a balance within the economy where supply = demand.
Disequilibrium
a circular flow where injections do not equal leakages
What is the role of households in the economy?
provide labor and resources to businesses in exchange for income, which they spend on goods, services, taxes, savings, and imports. High spending boosts business revenue, while high savings reduce consumption and slow economic activity.
How do businesses affect the circular flow?
produce goods and services, pay wages to households, and invest in production. Increased business investment creates jobs and stimulates growth, while lower investment and layoffs reduce household income and spending.
How does the government influence economic flow?
collects taxes and redistributes funds through public services, welfare, and infrastructure projects. Higher government spending injects money into the economy and boosts demand, while higher taxes reduce household and business spending.
What role does the financial sector play?
It channels household savings into loans for businesses and government investment. A strong financial sector promotes economic expansion, while low borrowing and excessive saving reduce the money supply and slow economic growth.
How does international trade impact the circular flow?
Exports bring money into the economy, while imports send money out. A trade surplus increases national income and employment, whereas a trade deficit can reduce domestic production and economic stability.
What is the difference between leakages and injections?
Leakages remove money from circulation, while injections add money back in. If injections exceed leakages, the economy grows; if leakages are higher, economic activity contracts.
How does the circular flow relate to economic growth?
When households, businesses, and the government spend and invest more, the economy expands, creating jobs and income. If spending falls and leakages increase, the economy slows, leading to lower demand and unemployment.
Why is investment important in the circular flow?
Investment in capital goods, infrastructure, and innovation increases production capacity and long-term growth. Low investment leads to stagnation, reducing income, employment, and national output.
How do government policies affect the circular flow?
Fiscal policies (taxation and spending) and monetary policies (interest rates and money supply) regulate economic stability. Expansionary policies boost economic activity, while contractionary policies slow inflation but may reduce growth.
What is the Connection Between GDP and Aggregate Demand
aggregate demand represents total spending on goods and services meaning increased AD leads to economic growth whereas decreased AD leads to GDP contraction
Connection Between the Resources and Goods Markets, and the Business and Household Sectors
In the circular flow of income model, the resources market connects households and businesses, with households providing factors of production in exchange for income. The goods market then links them by households using their income to purchase goods and services produced by businesses.
How can the Government Minimize Economic Fluctuations.
The government can minimize economic fluctuations by using fiscal policy and monetary policy to stabilize demand and economic growth.
Fiscal Policy
measures undertaken by governments in relation to raising revenue
Monetary Policy
measures implemented through revenue bank of Australia to bring about changes in aggregate demand by influencing money supply and interest rate.
How does technological change affect aggregate supply and the circular flow of income?
Technology boosts productivity, reducing costs and increasing output, which leads to higher income and employment in the circular flow, driving economic growth and shifting the PPC outward.
How does entrepreneurship affect the circular flow of income?
Entrepreneurs create businesses, jobs, and new products, boosting output, income, and employment, driving economic growth and shifting the PPC outward.
How does immigration affect the circular flow of income?
Immigration increases the labor force, expanding production capacity, boosting income and consumption, promoting economic growth, and shifting the PPC outward.
How do changes in aggregate supply impact employment?
Increased aggregate supply leads to more production, higher demand for labor, and reduced unemployment, driving economic growth and pushing the economy toward its potential on the PPC.
How do changes in aggregate supply affect economic growth?
An increase in aggregate supply expands the economy’s capacity, leading to economic growth and an outward shift in the PPC, reflecting higher production potential.
Economic Objectives
sustainable economic growth, price stability, full employment, external balance, high standard of living
Sustainable Economic Growth
increase the volume of goods and services produced
Price Stability
government’s role is to keep little variation in prices to ensure price stability.
Full Employment
aiming for the ‘natural rate of employment’ of 4 - 5% unemployment in the labor force.
External Balance
economy policy should create a balance between promoting exports and imports throughout the economy
High Standard of Living
policies should improve health standards, education and literacy, environmental sustainability, equitable distribution of wealth.
Budget Deficit
spending more than earnt, increase the circular flow of income
Budget Surplus
earning more than spent, decrease the circular flow of income
