The Circular Flow of Income Model Flashcards
What is National Income?
Value of output of an economy of a period of time
What is Circular Flow of Income?
Flow of goods and services between households and firms and their corresponding payments in money terms
What are the two groups of economic agents in a Circular Flow of Income?
Firms
Households
What do Households do in the Circular Flow of Income?
Own the factor inputs (wealth) of nation
Used to produce goods and services in exchange for factor rewards (income)
Use the factor rewards to buy goods and services from firms
What are factor inputs?
Land
Labour
Capital
Enterprise
What are Factor rewards?
Rent
Wages
Interest
Profit
What do firms do in the Circular Flow of Income?
Hire the factor inputs from households and use them to produce goods and services for sale back to households
What is Injection?
Money added to the circular flow of income
Spending which is not generated by households
What is Withdrawal/Leakage?
Money taken out of Circular Flow
Spending which does not flow back to domestic firms
What does ‘Y’ stand for?
Income
What does ‘Yd’ stand for?
Real income
What does ‘C’ stand for?
Consumption
What does ‘I’ stand for?
Capital Investment
What does ‘G’ stand for?
Government spending
What does ‘X’ stand for?
Exports
What does ‘M’ stand for?
Imports
What does ‘X-M’ stand for?
Net exports/imports
What does ‘T’ stand for?
Taxation
What does ‘S’ stand for?
Savings
What is National Income (Y) according to the circular flow of income?
Value of Income paid by firms to households in return for factor inputs
What is National Output (O) according to the circular flow of income?
Value of the flow of goods/services from firms to households
What is National Expenditure (E) according to the circular flow of income?
Value of spending by households on goods/services
all domestically produced in this instance with no foreign trade
What is the National Income Accounting Identity?
Y ≡O ≡E
What happens when the circular flow of income is in equilibrium?
There is no tendency to change
Injections must equal withdrawals
Output, expenditure and income flowing around circular flow remain the same
What are examples of injections into the Circular Flow of Income?
Investment
Government Spending
Exports
What are examples of withdrawals from the Circular Flow of Income?
Savings
Taxation
Imports
