How Economies Operate

Question 1

Name the factors of production and return (x4)

Answer 1

Natural resources - rent
Labour - Wages
Capital - Interest
Enterprise - Profit

Question 2

Describe the scarcity in each of the factors of production (x4)

Answer 2

Land - There are finite amounts of natural resources available for production

Labour - Supply of labour is limited by population size, skills and willingness to work

Capital - Supplies of capital are limited by the extent to which governments and the private sector are willing to invest and levels of domestic savings for investment

Enterprise - Supplies of entrepreneurial skills are limited to population size and a range of other cultural and economic factors, most importantly, innovation and risk taking

Question 3

What is GDP?

Answer 3

The total amount of goods and services produced in a year.

Question 4

What is the business cycle?

Answer 4

Fluctuations in the level of economic growth due to either domestic or international factors

Question 5

Name the impacts of a recession (x4)

Answer 5

• Falling production of goods and services
• Falling levels of consumption and investment
• Rising unemployment
• Falling income levels and quality of life

Question 6

Impacts of a boom (x4)

Answer 6

• Increasing production of goods and services
• Rising levels of consumption and investment
• Falling unemployment
• Rising income levels and quality of life

Question 7

Investment

Answer 7

Any current expenditure that is made in order to obtain benefits in the future

Question 8

What is equilibrium?

Answer 8

Sum of leakages = Sum of injections

Question 9

Leakages > Injections (x4)

Answer 9

• Downturn in the level of economic activity
• Falling incomes
• Falling incomes
• Rising unemployment

Question 10

Injections > Leakages (x4)

Answer 10

• Upturn in the level of economic activity
• Rising incomes
• Rising incomes
• Falling unemployment

Question 11

What is investment?

Answer 11

Any current expenditure that is made in order to obtain benefits in the future

Question 12

How may the government affect the circular flow of income?

Answer 12

The government can change levels of taxations, government revenue and therefore change the size of total leakages and injections and the overall level of economic activity

Question 13

How do market economies distribute goods and services?

Answer 13

Based on the individual’s contribution to the production process i.e. larger contribution, more output

Question 14

Circular flow of income model

Answer 14

Describes the operation of the economy and links between the main sectors in the economy