LS5- Circular flow of incomes

Question 1

Circular flow of income model

Answer 1

Shows how income flows in an economy

Households provide firms with FaOP in return for income
- capital for interest payments
- enterprise for profits
- land for rent
- labour for wages

This income is used to purchase goods and services from firms- expenditure

Question 2

Measuring GDP

Answer 2

Output = expenditure = income (used to show expenditure and output are equal)

O- the value of goods and services from firms to households
E- value of expenditure by households
Y- value of income paid to households by firms

Question 3

Injections

Answer 3

Spending in the economy which doesn’t come from households

Investment (I)- firms spending money on capital goods to increase productivity
Govt spending (G)- spending by govt on facilities such as new roads, schools, etc
Exports (X) - spending by foreign countries on goods/services manufactured domestically

Question 4

Withdrawals

Answer 4

Spending which does not flow back from households to firms

Savings (S)- money that is not spent by households
Taxes (T)- corporate and income
Imports (M)- money spent on foreign goods/services

Question 5

Leakages vs Injections

Answer 5

L>I- more money going out of an economy than coming in -> economic decline
L<I-> economic growth
L=I- macroeconomic equilibrium</I->