1) The Circular Flow Of Income - MMT Flashcards
What are the 3 different economic agents?
Households (including consumers and workers), business and government
Define income
Income can be defined as the rewards earned by the factors of production
What are the 4 factors involved in the production of goods and services?
Land, Labour, Capital and Enterprise
What type of income does Land, Labour, Capital and Enterprise earn?
1) Land - rent
2) Labour- wages
3) Capital - interest
4) Enterprise - profit
What do you focus on in Macroeconomics?
We focus on the whole economy, not individual parts of it
What makes up the economy of a country?
All the economic agents combined, all the work they’ve done, the money they’ve earns or spent, all of that in its entirety makes up the economy of the country
How is the size of the UK economy measured?
By adding together all money earner by workers, businesses and governments and spent by consumers, businesses and government
Why do we use ‘the circular flow of income’? Needs correcting
The money spent by consumers is similar to that earned by workers; adding them together would mean counting the same money twice
What does the circular flow of income show?
The circular flow of income and spending shows the connections between the different sectors of an economy, it shows flows of goods and services and factors of production between firms and households
What does the diagram for the circular flow of income consist of?
1) assume that the economy concerned is an isolated small island
2) there is no governmental and no links with the outside world, the island is made up of households and businesses only
3) in this simple model, the households supply the Labour that firms need; the firms pay households for this Labour and then the households use their wages to buy all of the goods and services the firms make
What pattern does the circular flow of income follow?
Production -> Income -> Expenditure-> Production
This circular flow is going on between households and firms
What are physical flows?
The movement of goods, services and Labour
What are monetary flows?
Describe the movement of money in return for the physical flow
What is the problem with the circular flow of income?
In the real world countries have:
Governments
Transactions with other countries
( this introduces the reality of outside injections and leakages into the economy from the circular flow of income)
What are examples of injections into the economy?
Government spending, overseas demands for business goods and services
