LS5 - Circular Flow of Income

Question 1

Circular Flow of Income Model

Answer 1

Shows how income flows in an economy.
1. Households provide firms with FaOPr (CELL), in return for income:
* Capital - interest payments
* Enterprise - profits
* Land - rent
* Labour - wages
2. This income is used to purchase goods and services from firms - expenditure

Question 2

Measuring GDP

Answer 2

Output = Expenditure = Income
1. E - Value of spending by households
2. O - The value of goods and services from firms to households
3. I - Value of income paid to households by firms

Question 3

Injections

Answer 3

Injection - spending in the economy which doesnt come from households
1. Investment (I) - firms spending money on capital goods to increase productivity
2. Govt spending (G) - spending by govt on facilities such as new roads, schools, etc
3. Exports (X) - spending by foreign countries on goods/services manufactured domestically

Question 4

Leakages/Withdrawals

Answer 4

Leakages - spending which does not flow back from households to firms
1. Savings (S) - money that is not spent by households, or money not spent by firms, as they wont spend al their money on wages/investment, but will keep some of it
2. Taxes (T) - govt takes money from households and firms (income and corporate tax)
3. Imports (M) - money spent on goods/services manufactured in a foreign country

Question 5

Leakages vs Injections

Answer 5

L > I: money going out of an economy more than money coming in - ECONOMIC DECLINE
L < I: money coming into a country more than money going out - ECONOMIC GROWTH
L = I: MACROECONOMIC EQUILIBRIUM