M 2.1 Circular Flow of Income Flashcards
What is investment?
spending by businesses on additions to capital stock (new equipment, computers)
What is consumption?
spending by households on goods and services
What three terms all refer to the output produced by the economy in a particular period
national income, national output and national expenditure
What must the economy produce for the flow of national output?
a stock of physical capital goods, stock of human capital, stocks of land and entrepreneurship
What are the factors of production?
a stock of physical capital goods, stock of human capital, stocks of land and entrepreneurship
5 examples of physical capital goods?
- roads
- machinary
- telecommunications
- furniture
What is stock?
measured at one specific time, represents a quantity existing at that point which has accumulated in the past
What is a flow variable?
measured over an interval of time.
What is national capital stock?
the stock of captial goods in the economy that has accumulated over time
What is national wealth?
the stock of all goods that exist at a point in time that have value in the economy
What is the national capital stock?
part of the stock of national wealth which comprises all physical assets owned by the nations residents
- excludes consumer goods
What is consumption/
total planned spending by households on consumer goods and services produced within the economy
What is the fraction of national income available for consumption is equal to?
differance between total national output and gross investment
in the short run what is the easiest way to increase living standards?
boost current consumption
What is GNI?
measurement of a country’s income which includes all income earned by a countrys residents and firms regardless of where its produced
what is national income?
measures incomes received by labour and other factors of production
WHat is national output?
measures the actual goods and services produced by the economy
national expenditure defo?
meausres the spending of incomes on goods and services
What does national income = ?
national output = national expenditure
What is the circular flow model?
an economic model showing the flow of goods and services, factors of production and their payments between households and firms within an economy
Explain households in the circular flow of income?
recieve income through wages and salaries from their jobs and investments and they then buy goods and services supplied by firms
Explain firms in the circular flow of income?
hire land, labour and capital inputs when making products for which they pay wages and rent. firms recieve payment from consumers
Explain government in the circular flow of income?
collect taxes to fund spending on public services
Explain external sector in the circular flow of income?
the Uk buys imports from other countries and overseas businesses and sonsumers buy UK products
What is a closed economy?
economy with no international trade
What are the two desicion makers in the CFI?
households and firms
What are the two markets in the CFI?
product market and resource market
What are the two transactions in the CFI?
resource markets - firms buy factors of production in resource market and use them to produce goods and services
product market: firm sell the goods and services to consumers in product markets
What are the two flows in the CFI?
flow of money , flow of output
What are the four factors of production and their payment?
land = rent labour = wage capital = interest entrepreneurship = proft
What is household expenditure?
payment that househol make to buy goods and services
What is household income?
income of household from selling goods and services
What is revenue?
payments that firms recieve from selling goods and services
what is costs of production ?
payment that firms make to buy factors of production
What is a withdrawel?
a leakage of spending power out of the circular flow of income into savings, taxation or imports
When is national income in equilibrium?
when total withdrawal is equal to total injection
Equilibrium equation?
saving + taxation + imports = investment + gov spending + exports
What is shrinking circular flow?
s + T + M > I + G + X
withdrawel is greater then injections, a net leakage of demand out of the circular flow occurs
What is growing circular flow?
injection is greater than withdrawel
