The circular flow

Question 1

4 economic participants of the circular flow

Answer 1

households
business
government
foreign sector

Question 2

Circular flow diagram

Answer 2

illustrates the interaction between economic participants and the flow of goods and services and money in the economy

Question 3

Households (7)

Answer 3

1 primary participant
2 own factors of production
3 Sell their factors of production to earn money
4 They buy goods & services through their income
5 They save & borrow money from financial institutions
6 They pay the gov taxes and in return are provided with subsidies etc.
7 They import/export goods &services

Question 4

Firms (8)

Answer 4

1 buy and demand factors of production
2 produce and sell goods and services and receive income
3 save and borrow money from financial institutions
4 Pay taxes to gov. and receive subsidies and goods
5 they export/import
6 collect and receive taxes from other participants
7 provide transfer payments and infrastructure to households
8 provide public goods to firms and businesses

Question 5

Foreign Sector (3)

Answer 5

1 Buys factors of production from households
2 make payments for factors of production
4 they earn income and make payments for goods and services

Question 6

Government (public sector)

Answer 6

1 Purchase factors of production from households in the factor market and by purchasing goods and services
2 provides households and firms with goods not produced by firms (known as public goods)
3 Receives revenue from households and businesses in the form of taxes

Question 7

Open economy

Answer 7

when a country trades with other countries

Question 8

Closed economy

Answer 8

when a country does not interact with the economy of other countries

Question 9

Product market

Answer 9

markets for consumer goods and services.

Question 10

factor market

Answer 10

A market where the factors of production are traded

Question 11

Financial market

Answer 11

Act as a link between households, the business sector and other participants

Question 12

money market

Answer 12

used by participants as means of borrowing and lending in the short term

Question 13

capital market

Answer 13

market in which the individuals and institutions trade financial securities in the long term.

Question 14

Foreign exchange market

Answer 14

businesses buy and sell foreign currency to pay for imported goods and services

Question 15

Y

Answer 15

total expenditure

Question 16

C

Answer 16

denotes all consumption

Question 17

G

Answer 17

All government spending on goods and services

Question 18

T

Answer 18

The value of money flow that represents taxes paid to the government

Question 19

X

Answer 19

The money we receive from foreign countries (exports)

Question 20

M

Answer 20

Money that we spend on buying goods and services from overseas (imports)

Question 21

Circular flow formula

Answer 21

Y = C+G+X-M

Question 22

Injection

Answer 22

putting money back into the circular flow of the economy

Question 23

Leakage

Answer 23

Withdrawal of money out of the circular slow of the economy

Question 24

Real flow

Answer 24

the flow of goods and services and factors of production

Question 25

Money flow

Answer 25

The continuous flow of money income and spending in the economy.

Question 26

Formula for injections

Answer 26

J= I + G + X

Question 27

Formula for leakages

Answer 27

L=S+T+M

Question 28

GNI

Answer 28

Gross National Income

The total compensation paid to the owners of the factors of production within a given period

Question 29

GDP

Answer 29

Gross Domestic Product

The value of all goods and services produced within the borders of the country within a given period of time

Question 30

3 ways GDP can be calculated

Answer 30

production method
Income method
Expenditure method

Question 31

Aggregate spending is made up of (formula)

Answer 31

C + I + G + (X-M)

Question 32

Measures of economic activity are important to.. (3)

Answer 32

determine the standard of living in a country
compare prosperity levels between countries
measure economic growth from one year to the next