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macroecon theme 2 cc 1 > The Circular Flow of Income Model > Flashcards

The Circular Flow of Income Model Flashcards

1
Q

What is National Income?

A

Value of output of an economy of a period of time

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2
Q

What is Circular Flow of Income?

A

Flow of goods and services between households and firms and their corresponding payments in money terms

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3
Q

What are the two groups of economic agents in a Circular Flow of Income?

A

Firms

Households

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4
Q

What do Households do in the Circular Flow of Income?

A

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

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5
Q

What are factor inputs?

A

Land
Labour
Capital
Enterprise

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6
Q

What are Factor rewards?

A

Rent
Wages
Interest
Profit

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7
Q

What do firms do in the Circular Flow of Income?

A

Hire the factor inputs from households and use them to produce goods and services for sale back to households

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8
Q

What is Injection?

A

Money added to the circular flow of income

Spending which is not generated by households

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9
Q

What is Withdrawal/Leakage?

A

Money taken out of Circular Flow

Spending which does not flow back to domestic firms

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10
Q

What does ‘Y’ stand for?

A

Income

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11
Q

What does ‘Yd’ stand for?

A

Real income

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12
Q

What does ‘C’ stand for?

A

Consumption

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13
Q

What does ‘I’ stand for?

A

Capital Investment

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14
Q

What does ‘G’ stand for?

A

Government spending

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15
Q

What does ‘X’ stand for?

A

Exports

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16
Q

What does ‘M’ stand for?

A

Imports

17
Q

What does ‘X-M’ stand for?

A

Net exports/imports

18
Q

What does ‘T’ stand for?

A

Taxation

19
Q

What does ‘S’ stand for?

A

Savings

20
Q

What is National Income (Y) according to the circular flow of income?

A

Value of Income paid by firms to households in return for factor inputs

21
Q

What is National Output (O) according to the circular flow of income?

A

Value of the flow of goods/services from firms to households

22
Q

What is National Expenditure (E) according to the circular flow of income?

A

Value of spending by households on goods/services

all domestically produced in this instance with no foreign trade

23
Q

What is the National Income Accounting Identity?

A

Y ≡O ≡E

24
Q

What happens when the circular flow of income is in equilibrium?

A

There is no tendency to change
Injections must equal withdrawals
Output, expenditure and income flowing around circular flow remain the same

25
Q

What are examples of injections into the Circular Flow of Income?

A

Investment
Government Spending
Exports

26
Q

What are examples of withdrawals from the Circular Flow of Income?

A

Savings
Taxation
Imports

macroecon theme 2 cc 1 (7 decks)

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