Topic 2.1 The Circular Flow of Income

Question 1

Describe the circular flow of Income

Answer 1

It is the relationship between households and firms. Households give firms consumer spending and factors of production, whereas firms give households wages/income/rent (factor incomes) and goods/services

Question 2

Injections

Answer 2

This is money that enters the economy.
1. Investment - spending on capital goods will increase output.
2. Exports - more money coming into the economy
3. Govt speding - policies such as increasing welfare would create an incentive to buy more.
These are put in alongside consumer spending.

Question 3

Withdrawals

Answer 3

This is money that exits the economy.
1. Savings - more savings means less spending
2. Imports - more money leaving the economy therefore less money within the economy
3. Taxes - reduces disposable income.
These are taken from factor incomes given from firms to households.

Question 4

Net injections

Answer 4

Expansion of national output

Question 5

Net withdrawals

Answer 5

Contraction of national output

Question 6

Macroeconomic Equilibrium

Answer 6

When AD = AS
When rate of injections = rate of withdrawals.

Question 7

National income

Answer 7

National income is the total value of goods and services a country produces. It can be measured by GDP (within the economy), GNP (outside + within the economy) and GNI (total income earned anywhere).

Question 8

GDP methods

Answer 8

1) Output method: You can measure the total value of goods/services within an economy during a year
2) Income method: You can measure the total value of factor incomes within an economy during a year
3) Expenditure method: You can measure the total consumer expenditure (C + I + G + X - M) on all goods/services.
Income = Output = Expenditure, since we are measuring the same circular flow of income so they will all be equal to each other.