The Circular Flow of Income Flashcards
What is the definition for ‘The Circular Flow of Income’?
‘An economic model showing the flow of goods and services, factors of production and payments between households and firms within a closed economy’.
On the diagram for the circular flow of income, what flows from firms to households?
-Income, Rent, Wages, Interest, Profit
-Goods and Services
On the diagram for the circular flow of income, what flows from households to firms?
-Factors of production
-Expenditure on goods and services
What are the 3 ways of measuring economic activity?
-National Output
-National Expenditure
-National Income
What are the assumptions that have to be made for the model to be appropriate?
-Households spend all of their income on goods and services
-Firms spend all their income on factors of production
-There is no government
-There is no foreign trade
What is an Injection into the model?
-Adding money into the circular flow through the form of: Exports, Investment, Government Spending
What is a withdrawal from the model?
-Removing money from the circular flow in the form of: Imports, Taxation, Savings.
What happens when injections exceed withdrawals?
Expenditure will exceed the planned level of output = firms will increase output = output and national income will increase = expenditure will increase.
What happens when withdrawals are greater than injections
-Output will exceed expenditure = firms will reduce output = national income and expenditure will decrease.
When is the macroeconomic economy in equilibrium?
When injections = withdrawals.
When is the macroeconomic economy in disequilibrium?
-When the plans of firms and households differ.
