2.4.1 CFI part 1

Question 1

Define circular flow of income

Answer 1

An economic model that shows flows of goods and services and factors of production between firms and households. The circular flow shows how national income or Gross Domestic Product is calculated.

Question 2

Define income

Answer 2

Income represents a flow of earnings from using factors of production to generate an output of goods and services

Question 3

Define wealth

Question 4

State examples of factor rewards

Answer 4

wages and salaries are a factor reward to labour and interest is the flow of income for the ownership of capital. Rent is the reward to land and profit is the reward to enterprise

Question 5

Define wealth

Answer 5

The value of a stock of assets such as housing, personal pensions, savings and many different forms of marketable (sellable) assets such as antiques.

Question 6

What is the difference between income and wealth

Answer 6

income is a flow of money whereas wealth is stock conept - these resources aren’t currently being used in the CFI but could be in the future

Question 7

Whats the link between wealth and income

Answer 7

its likely that a high income individual will also have high wealth because they will be able to purchase more expensive assets

Question 8

Define injections

Answer 8

Injections are variables in an economy that add to the circular flow of income and include investment (I), government spending (G) and exports (X).

Question 9

Define withdrawals/leakages

Answer 9

Withdrawals are variables in an economy that remove money flows from the circular flow of income and include saving (S), government taxation (T) and imports (M).

Question 10

Where do injections and withdrawals come from

Answer 10

• injections go directly to firms
• withdrawals can be made by households or firms

Question 11

Define real national output

Answer 11

Nominal national output adjusted for price changes, expressed at constant prices.

Question 12

Define equilibrium national output

Answer 12

a situation where there is no tendency for change. At this point aggregate demand is exactly equal to aggregate supply.

Question 13

When is the economy in equilibrium

Answer 13

when injections and withdrawals are equal

Question 14

What happens when withdrawals exceed injections

Answer 14

output is greater than expenditure so firms reduce output and national output, income and expenditure will decrease
- essentially, a fall in economic growth