LS5 Circular Flow

Question 1

What are injections and leakages?

Answer 1

Injections:
– Investment
– Government spending
– Exports

Leakages:
- Savings
– Taxes
– Imports

Question 2

What does the circular flow of income model show?

Answer 2

It shows the flow of goods/services/factors of production /payments between households and firms.

Question 3

Define national output

Answer 3

The value of the flow of goods and services from firms to households

Question 4

Define national expenditure

Answer 4

The value of spending by households on goods and services

Question 5

Define national income

Answer 5

The value of income paid by Phone’s to households in return for land, labour and capital

Question 6

Explain the model of a closed economy

Answer 6

Households own the wealth of the nation, and they own the stock of land, labour and capital used to produce goods and services
They supply these to firms in return for income (rents/wages/interest/profits)
Households than use this money to buy goods and services produced by firms
This is circular flow of income

Question 7

What’s the difference between a closed economy and an open economy

Answer 7

Closed economy is an economy operating without import/export. Therefore it is closed to global trade.
An open economy is an economy with low tariff and nontariff barriers and is deeply integrated into the regional and global economy. It is open to trade globally.

Question 8

What are the three ways of measuring total economic activity in an economy?

Answer 8

O is equivalent to E is equivalent to Y
National output, national expenditure and national income are equivalent

Question 9

Describe the three injections

Answer 9

Investment is spending by firms on new capital equipment, like factories, offices, or training or stocks of goods
Government spending spending by central and local governments as well as other government agencies
Exports is spending by foreigners on goods and services made domestically

Question 10

Describe the three withdrawals

Answer 10

Saving by households is money which is not spent by households or by firms
Taxes are paid for the government by both households and firms
Imports are bought by both households and firms from abroad

Question 11

What happens when the circular flow is in equilibrium and when it isn’t

Answer 11

When the circular flow is an equilibrium injections, equal withdrawals
When injections are greater than withdrawals, there is economic growth
When withdrawals are greater than injections, economic growth slows or becomes negative