the circular flow of income Flashcards
what is income?
Income is a flow in the economy, whereas wealth is a stock of assets that can be used to generate income
what is normally used to measure income?
Nominal and real GDP are often used to measure national income
what is nominal GDP
Nominal GDP is the actual value of all goods and services produced in an economy in a one-year period
There has been no adjustment to the amount based on the increase in general price levels (inflation)
The word nominal refers to the fact that the metric has not been adjusted for inflation
what is real GDP ?
Real GDP is the value of all goods and services produced in an economy in a one-year period, adjusted for inflation
what does it mean when real income is rising ?
If real income is rising, then the economic performance of the country is improving
It is also very likely that the standard of living in the economy is also improving
what does it mean when real income falls ?
If real income falls during a period of recession, it is likely that there will be a fall in the standard of living of individuals in the economy
what does the rate of change of national income measure ?
measures the change in economic growth in an economy
Both the level and rate of change in national income are valuable for cross-country comparisons
what is the digram for the circular flow in a closed diagram?
look in book
circular flow of a closed economy analysis
Households own the wealth in the economy
These are the factors of production
Households supply their factors of production to firms and receive income as a reward
They receive rent for land, wages for labour, interest for capital, and profit for enterprise
With this income, they purchase goods and services from firms
Firms purchase factors of production from households
They use these resources to produce goods and services
They sell the goods and services to households and receive sales revenue
what is the circular flow used to show ?
used to illustrate national income and the flow of money, resources and goods in an economy
what does an open circular flow of income demonstrate?
demonstrates the relationship between all of the economic agents that interact in a global world
There are high levels of interdependence between households, firms, the government, the financial sector, and the foreign sector (foreign firms and households)
what is the digram for a circular flow in an open economy ?
look in book
diagram analysis of circular flow of an open economy
Households and firms have been explained in the closed circular flow of income model above
Government: The government influences the size of the circular flow through its taxation (T) and spending policies (G)
Financial sector: The financial sector influences the size of the circular flow by providing funds for Investment (I) and a safe place for households and firms to store their savings (S)
Foreign sector: Globalisation means that the level of exports (X) and imports (M) significantly affects the size of the circular flow of income in most countries
how can national income be calculated ?
nominal GDP = C+ G + I + (X - M)
how can nominal income be calculated?
national income= W + R + I + P
I = interest from capital
W= wages from labour
R = rent from land
P = profit from entrepreneurship
