The Circular Flow Model Flashcards
What is the Circular Flow Model?
The Circular Flow Model shows how money, goods, services, and resources flow between different sectors of the economy: households (consumers), businesses (producers), government, financial sector, and the overseas sector.
What are the two main types of flows in the Circular Flow Model?
Real flows (goods and services, factors of production) and money flows (income, expenditure).
What role do households play in the Circular Flow Model?
Households provide factors of production (labor, capital, land, entrepreneurship) to businesses and receive factor incomes (wages, rent, interest, profit). They also consume goods and services produced by businesses.
What are factor incomes or rewards?
The payments households receive for providing factors of production: wages (for labor), rent (for land), interest (for capital), and profit (for entrepreneurship).
What role do businesses play in the Circular Flow Model?
Businesses use factors of production from households to produce goods and services. They sell these goods to households and other sectors, generating revenue and profit.
What is the difference between investment and consumption in the Circular Flow?
Consumption is spending by households on goods and services, while investment refers to spending by businesses on capital goods like machinery and buildings.
How does the government participate in the Circular Flow Model?
The government collects taxes from households and businesses, provides public goods and services, and makes transfer payments (like unemployment benefits) to households.
What are transfer payments?
Payments made by the government to individuals without any goods or services being exchanged in return, such as welfare payments, pensions, or unemployment benefits.
What is the role of the financial sector in the Circular Flow Model?
The financial sector facilitates savings from households and investment by businesses. It channels funds from savers to borrowers, promoting economic activity.
What are injections in the Circular Flow Model?
Injections are flows of money into the circular flow that increase economic activity, such as investment (I), government spending (G), and exports (X).
What are withdrawals (or leakages) in the Circular Flow Model?
Withdrawals are flows of money out of the circular flow that reduce economic activity, including savings (S), taxes (T), and imports (M).
What is the role of the overseas sector in the Circular Flow Model?
The overseas sector represents international trade. Households and businesses purchase imports (withdrawal) from abroad, and businesses sell exports (injection) to foreign markets.
How do exports affect the circular flow?
Exports bring money into the domestic economy from foreign buyers, acting as an injection into the circular flow of income.
What is the difference between real flows and money flows?
Real flows refer to the physical movement of goods, services, and factors of production, while money flows refer to the payments made for these goods, services, and factors (like wages or profits).
How do savings and investment impact the circular flow of income?
Savings are a withdrawal from the circular flow as they reduce consumption, while investment is an injection as it increases spending by businesses on capital goods.
