8.1 Circular Flow of Income Model Flashcards
(25 cards)
What is macroeconomics?
Macroeconomics studies the economy as a whole, composed of collections of many consumers, firms, resource owners, and markets.
How does microeconomics differ from macroeconomics?
Micro: Individual consumers/parts of economy. Macro: Economy as a whole.
Define ‘Circular flow of income’.
A flow of income in an economy where output = income = expenditure.
Define ‘National income’.
The total income of an economy, consisting of wages, interest, rent, and profit.
Define ‘Consumption’.
Spending by households on goods and services.
Define ‘Injections’.
Entry into the income flow of funds, including investment, government spending, and exports.
Define ‘Leakages’.
Withdrawals from the income flow, including savings, taxes, and imports.
In the Circular Flow of Income Model (closed economy, no government), who owns the factors of production?
Households.
How do firms acquire factors of production in the Circular Flow of Income Model?
Firms buy them from households through the resource market.
What market do households use to buy goods and services?
The product market.
What does the clockwise flow in the Circular Flow of Income represent?
Flow of factors of production.
What does the anti-clockwise flow represent?
Flows of money: income, expenditure, and revenue.
What is the relationship between income flow, expenditure flow, and value of output flow?
They are equal: income = expenditure = value of output.
What is a Product Market?
A market where final goods and services are sold.
What is a Resource Market?
A market where factors of production are sold.
How are savings and investment related in the circular flow model?
Savings = leakage; Investment = injection.
How are taxes and government spending related in the circular flow model?
Taxes = leakage; Government spending = injection.
How are imports and exports related in the circular flow model?
Imports = leakage; Exports = injection.
What happens if injections < leakages in the circular flow model?
The income flow shrinks.
What happens if injections > leakages?
The income flow expands.
Rewards for factors of production
Land = rent
Labour =wages
Capital = inetrest
Entreprise = profit
Which of the following statements is true about the circular flow model?
If injections are greater than leakages, the size of the circular flow increases.
What is the net effect on income if exports > taxes?
Income increases.
What is the net effect on income if taxes > exports?
Income decreases.
