Chapter 3: The Economic Circular Flow Model

Question 1

Name and explain the three major flows in the economy

Answer 1

Production, Spending and Income

Production is not necessarily pursued for its own sake but rather to satisfy human wants

Essentially production creates income that is then used for spending.

Production employs labour, capital and natural resources to produce goods and… in return household are rewarded for their labour through income** which is then spent** on consumer goods

Question 2

Name two differences between stocks and flows

Answer 2

Stocks have no time dimensions. Flows have a time dimension.

Stocks are measured at a specific moment. Flows are measured over a period.

Question 3

Name the factors of production

Answer 3

Natural Resources
Labour
Capital
Entrepreneurship

Question 4

What is the difference between quantity and quality of labour

Answer 4

Quantity of labour depends on the size of population that are able and willing to work known as the labour force.

Quality of labour is the skills, knowledge and health of the workers

Question 5

What is capital as a factor of production

Answer 5

It is the manufactured resources such as machines tools and buildings (tangible resources) that are used to produce other goods and services

Question 6

What is sometimes seen as a fifth factor of production

Answer 6

Technology

Question 7

What is not seen as a factor of production and why

Answer 7

Money, because it is only a medium of exchange

Question 8

What does the economic question of HOW solve?

Answer 8

It essentially involves choosing the best method of production whether it is capital or labour intensive

Question 9

Name the four sources of income and which factor of production they belong to

Answer 9

Rent (natural resources)
Wages (labour)
Interest (capital)
Profit (entrepreneurship)

Question 10

What does the total income in the economy consist of

Answer 10

Rent, wages and salaries, interest and profits

Question 11

Name the sources of spending

Answer 11

Households (C)onsumers
Firms
Government
Foreign Sector

Question 12

What are the characteristics of Households (C)

Answer 12

They are also called consumers

Maximise satisfaction

They own most factors of production and sell them on the factor market to firms

In exchange for their services they are rewarded with an income in the form of wages, salaries, rent, interest and profit

They use their income to buy consumer goods and services in the goods market which are then used to satisfy human wants

Question 13

What are the characteristics Firms (I)

Answer 13

They are also known as the production agents since they decide how goods and services will be produced

Profit maximisation

They buy factors of production in the factor market

They transform the factors of production into goods and services which are then sold in the goods market

One of the factors of production purchased by firms is capital. Thus when firms buy capital goods for them it’s an investment

Question 14

What is the difference between goods market and factor market

Answer 14

Goods market is where consumer goods and services are bought and sold

Factor market is where factors of production are purchased and sold

Question 15

Draw the circular flow of goods and services then also draw the circular flow of income and spending that excludes the government

Answer 15

Check slides 18 & 19

Question 16

What are the characteristics of the Government (G)

Answer 16

The government set up the frameworks (legal) within which the economy operates.

They purchased factors of production from households and they also purchase goods and services from firms in the goods market

Provides public goods and services such as roads and health

Which of finance by levying tax on income (income tax) and expenditure (VAT) on households and firms

Also transfers some of its tax revenue to needy people (e.g. pension funds, child-support and grants)

Question 17

Draw the circular flow of income and spending that includes the government

Answer 17

Slide 22

Question 18

Write down the formula for total expenditure

Answer 18

A=C+I+G + (X-Z)

Question 19

What are the characteristics of the Foreign Sector (X-Z)

Answer 19

The foreign sector is all countries and institutions outside of the country’s borders

Exports (X) are items produced in a country but sold to the rest of the world

Imports (Z) are produced in the rest of the world but purchased for use in a country

Question 20

Explain injections and list them

Answer 20

Injections are a boost in the circular flow leading to multiplied expansion of output

Investment spending (I)
Government (G)
Exports (X)

Question 21

Explain leakages and list them

Answer 21

Leakages are a withdrawal from the circular flow reducing money available in the rest of the economy

Taxes (T)
Savings (S)
Imports (Z)

Question 22

What are the laws of comparative advantage

Answer 22

Specialisation
Exchange
Opportunity cost

Question 23

Name the five macro economic objectives

Answer 23

1. Economic growth
   Increase of production and income
2. Full employment
   Low unemployment
3. Price stability
   Low inflation
4. Balance of payments stability
5. Equitable
   Decreased poverty and a narrow gap between the rich and poor

Question 24

What is the balance of payments

Answer 24

It’s an accounting record, it summarises transactions between South African households, firms, governments and foreign households during a particular period

Question 25

South Africa’s factor endowment

Answer 25

Natural resources
Labour
Capital
Entrepreneurship