The Circular Flow of Income & National Income

Question 1

Define The Circular Flow of Income and Spending

Answer 1

It illustrates the linkage between different sectors of the economy.

Question 2

National Income

Answer 2

The income of an economy earned by all workers and businesses over a period of time.

Question 3

Gross Domestic Product (GDP)

Answer 3

The total value of output produced in a given time period.

Question 4

What are the 3 methods used to calculate National Income/GDP?

Answer 4

The Expenditure Method
The Income Method
The Output Method

Question 5

Name and explain what the factor incomes are.

Answer 5

Wages/Salaries = earned by those in work.
Profits = earned by companies trading goods & services.
Rent = earned by those who allow their land and property to be used by others.
Interest = earned by those who invest capital in financial assets.

Question 6

What is the expenditure method and how do you calculate it.

Answer 6

It involves adding up all the spending in an economy over a period of time. Also known as Aggregate Demand:
AD = (C)onsumer Spending + (G)overnment Spending + (I)nvesment + (N)et Exports (X-M)

Question 7

Define Injection and give examples of them.

Answer 7

Extra money placed into the circular flow of income. E.g. investment spending, export of g/s & government spending.

Question 8

Define Leakages/Withdrawals and give examples of them.

Answer 8

Money taken out of the circular flow of income. E.g. put aside for future spending (savings), paid to the govt in taxation, spent on foreign-made g/s (imports)

Question 9

What are the 3 sectors of the economy?

Answer 9

Primary, Secondary/Manufacturing & Quaternary

Question 10

What is the output method.

Answer 10

It involves totalling the value of all output produced in the economy for a period of time for each sector of the economy.

Question 11

Why is it important to keep track of the rate of growth of national income.

Answer 11

It helps keep track of economic growth.
It can track any changes to living standards.
It can track any changes to the distribution of income between groups within the population.

Question 12

Which incomes are excluded from the GDP by factor incomes calculation?

Answer 12

Transfer Payments e.g. state pensions.
Private Transfers of money from one individual to another.
Income not registered with the tax authorities (known as the shadow economy).

Question 13

Why is the figure of GDP by factor incomes not accurate?

Answer 13

Some financial activity such as subsistence farming and barter transactions are not officially recorded.

Question 14

Gross National Income (GNI)

Answer 14

Measure the final value of incomes flowing to UK owned factors of production whether they are located in the UK or overseas.

Question 15

What is the formula for to calculate GNI?

Answer 15

GNI = GDP + Net property income from abroad (NPIA)

Question 16

Remittances

Answer 16

They are transfers of money across national boundaries by migrant workers.

Question 17

Nominal income

Answer 17

Measure income at current prices with no adjustment for inflation.

Question 18

Real GDP

Answer 18

Measures the volume of output.

Question 19

What does Purchasing Power Parity (PPP) measure?

Answer 19

It measures how many units of one country’s currency are needed to buy exactly the same basket of goods and services as can be bought with a given amount of another country’s currency.