2.4.1 National Income

Question 1

Explain what the circular flow is.

Answer 1

1. Households receive factor incomes through earning wages and salaries from jobs and income from their
   investments; they buy goods and services supplied by firms (consumer spending)
2. Businesses hire land, labour & capital inputs when making products for which they pay wages and rent. Firms receive payment from consumers (thus creating revenues and profits)
3. Government collects taxes (T) to fund spending on public services e.g. education, healthcare and defence and welfare assistance. State spending is labelled as G (government spending)
4. The UK buys imports from other countries, (M) and overseas businesses and consumers buy UK exports (X)

Question 2

What does the circular flow model look like in a closed economy i.e. no international trade?

Answer 2

Question 3

What does the circular flow look like with an external trade sector i.e. an open economy?

Answer 3

Question 4

What does the financial sector do?

Answer 4

The financial sector – including commercial banks, debt and equity markets, helps channels savings into funding
productive investment.

Question 5

What does the circular flow with a financial sector added look like?

Answer 5

Question 6

What is income?

Answer 6

Income is a flow of money going to factors of production

Question 7

How can income be received?

Answer 7

• Wages and salaries from jobs
• Rental income from property
• Interest from savings
• Profits flowing to shareholders

Question 8

What is original income?

Answer 8

Income from jobs, private pensions & interest from savings

Question 9

What is gross income?

Answer 9

original income + cash (welfare) benefits

Question 10

What is disposable income?

Answer 10

gross income minus direct taxes

Question 11

What is post tax income?

Answer 11

disposable income minus indirect taxes

Question 12

What is the difference between money and real income?

Answer 12

• Income is money received as payment for work
• Money income measures income at current prices - also known as nominal income
• Real means adjusted for inflation. Real income measures the true purchasing power of someone’s income
• Real income (inflation adjusted) is measured at constant prices

Question 13

Explain the economic impact of falling real incomes

Answer 13

Question 14

What is wealth?

Answer 14

Wealth is the value of a stock of assets owned by someone or society as a whole

Question 15

Where does wealth come from?

Answer 15

• Savings in bank accounts
• Ownership of property
• Shares / stocks in businesses
• Wealth held in occupational pension schemes