CFI Part 2

Question 1

Define closed economy

Answer 1

an economy operating without imports and exports, i.e closed to foreign trade

Question 2

define open economy

Answer 2

an economy with low tariff and non-tariff barriers which is deeply integrates into the regional and global economy (engages in foreign trade)

Question 3

what is the economy made up of

Answer 3

firms and households

Question 4

explain the model of circular flow of income in a closed economy

Answer 4

1) Household own the wealth of the nations
2) households supply the FOP to firms
3) firms then use the FOP to produce goods and services (NATIONAL OUTUT)
4) in return for providing the FOP, households received rent, wages, profit and interest (NAtional income)
5) households then use some of the rewards to purchase goods and services from firms (national expnediture) - this is CFI
so national output = national expenditure = national income

Question 5

What is CFI made up of

Answer 5

national output = national expenditure = national income

Question 6

What is national output

Answer 6

the vaoue of the flow of goods and services from firms to households

Question 7

What is national expenditure

Answer 7

value of spending by households on goods and services

Question 8

What is national income

Answer 8

the value of income paid by firms to household in return for land, labour and capital

Question 9

What type of spending isn’t included in CFI

Answer 9

consumer/household spending

Question 10

What assumptions does the CFI model

Answer 10

The economy consists of two groups – firms and households
Firms produce goods and services – households consume themselves
Households own all the economic resources (land, labour, capital)
The economy is __closed __(there is no foreign trade)
There is no public sector ( no taxation or public expenditure)
Households spend all their income (there is no saving