Macro 2: Circular Flow of Income and GDP Flashcards
What is an economic agent?
An individual or company that influences an economy by producing, selling or buying goods and services or investing money.
What are the three main economic agents?
Households, firms and government
What is the role, objective/aim and incentive of households?
Role- to supply factors of production and purchase goods and services
Objectives/aims- maximise personal satisfaction
Incentives- cost changes
What is the role, objective/aim and incentive of firms?
Role- to convert factors of production into goods and services
Objectives/aims- maximise profit
Incentives- prices change
What is the role, objective/aim and incentive of government?
Role- to generate revenue to provide an essential economic framework
Objectives/aims- maximise social welfare
Incentives- votes
What is the circular flow model?
A feedback loop between households and firms. The government creates a leakage in the circular flow by imposing taxes, but also inject money through social transfers like state pension, housing benefits etc.
What is the external sector?
The UK buys imports from other countries, (M), and overseas businesses and consumers buy UK products- known as exports (X).
What is the financial sector?
It’s a way of channeling the savings of households and businesses and repackaging them in the form of loans and other forms of finance, eg. to fund business investments.
What are the 3 types of injection of extra spending into the circular flow model?
-Investment in capital goods
-Exports of goods and services
-Government spending
This inflates the value/volume of production in the economy.
What are the 3 types of leakage or withdrawal from the circular flow?
-Savings
-Imports of goods and services
-Taxation
This depresses/ deflates the level of demand and output.
When is the circular flow in balance?
When the level of injections= the level of withdrawals.
What happens when injection > leakages?
The level of national income will rise.
What happens when leakages > injection?
The level of national income will contract.
What are the three things an economist might measure when measuring the amount of economic activity in an economy?
1) Total production of goods and services
2) Total household income
3) Total expenditure
In theory the value of each one of these should be the same.
How long is the course of which an economist measures the size of an economy?
A year.
What does nominal GDP include?
Apparent increases in income and expenditure that arise merely because of inflation.
What is real GDP?
Adjusted to account for inflation.
If inflation in the economy one year has been 5% and nominal GDP has increased by 5% what happened to real GDP?
Real GDP hasn’t increased at all because the apparent increase in output is only the product of more money being spent on the same quantity of products.
How is GDP calculated?
Consumption + Interest + Government spending + (Export - Import)
What is national income?
The total monetary value of the output of goods and services within an economy over a given period of time. Also, the total income earned within an economy over a given period of time.
What is real national income?
The total value of the output of goods and services within an economy over a given period of time adjusted to account for changes in the price level.
What is GDP per capita?
The total output of the economy divided by the number of people within the economy.
Why is it useful to have GDP per capita if there is a sudden increase in the birth rate in an economy?
Output may increase as demand for goods and services increases but the new members of the economy are unable to make any contributions so GDP per capita decreases.
What are the four agents in the circular flow model?
Households, businesses/firms, government and the external sector.
