Chapter 1 Flashcards
(13 cards)
What are the three main types of markets?
Product Market – Where goods and services are exchanged.
Factor Market – Where factors of production (labor, land, capital) are bought and sold.
Financial Market – Where money is saved and invested.
What are the components of leakages (L)?
Taxes (T), Savings (S), and Imports (M)
→ L = T + S + M
What is the difference between a closed and open economy?
A closed economy has no foreign sector (no exports/imports), while an open economy includes trade with foreign markets.
What are the two types of flows in the circular flow model?
Real Flow (exchange of goods/services and factors of production) and Money Flow (exchange of income, spending, taxes, etc.).
What is the formula for total income (Y)?
Y = C + I + G + (X - M), where:
C = Consumption
I = Investment
G = Government Spending
X = Exports
M = Imports
What happens when leakages exceed injections?
Economic decline (less demand, production, and income).
What is the relationship between GDP and total income?
GDP = Y because GDP measures total production, which equals total income.
What happens when injections exceed leakages?
Economic growth occurs (more demand, production, and income).
What are the components of injections (J)?
Government Spending (G), Investment (I), and Exports (X) → J = G + I + X
What are the three methods to calculate GDP?
Production Method – Adds the value of production at each stage.
Income Method – Adds total earnings from factors of production.
Expenditure Method – Adds all spending on final goods/services.
What is the difference between GDP and GNP?
GDP measures production within a country’s borders.
GNP measures production by a country’s citizens, regardless of location.
What is the multiplier formula?
K = 1 / (1 - MPC) or K = 1 / MPS
What does a higher MPC mean for the multiplier?
A higher MPC leads to a larger multiplier effect, increasing total income.
