The circular flow of income Flashcards
What is the circular flow of income?
The flow of spending and income between house holds and firms including injunctions and withdrawals.
What does are the only two agents/ sectors in a simple economy?
1) Household.
2) Firms.
What do households do?
Set up firms by providing them with factors of production.
What do households provide the firms with?
Factors of production:
1) Land
2) Labour
3) Capital
4) Enterprise
What do the firms do?
1) Using factors of production the firms create services and goods for the households to buy.
2) At the end of the year they reward households in payments for giving them the factors of production.
How do firms reward the households?
1) Entrepreneurs receive profit.
2) The providers of capital receive interest.
3) The labour receives wages.
4) The land owners receive rent.
What happens in the first flow in the circular flow of income?
Household provide firms with the factors of production.
What happens in the second flow of the circular flow income?
The firms produce goods and services using the factors of production. This is called output (O).
What happens in the third flow of the circular flow of income?
Firms give an income to the households as payment/ rewards for the factors of production : Interest, profit, wages and rent. This is called income (Y).
