Circular flow Flashcards
What is the definition of the circular flow model?
An illustration of how income, goods and services and factors of production move between the different role players of an economy.
What are the four participants in the circular flow model?
- Households
- Firms
- Government
- Foreign Sector
What characterizes an open economy?
All four participants (households, firms, government, foreign sector) are present.
What characterizes a closed economy?
The absence of the foreign sector, thus no exports and imports.
What is the role of private households in the economic flow?
They supply business with labour through the factor market and own all the factors of production (FOPs).
What does consumption of goods and services denote in the economic flow?
C
What is the role of the public sector in the circular flow?
It buys labour from households and goods & services from firms to provide goods & services to households and firms.
What does government expenditure denote in the economic flow?
G
What does the foreign sector refer to in the economic flow?
Exports and imports from international countries.
What are the five macroeconomic goals of the government?
- Positive Economic growth
- High employment/Low unemployment
- Price Stability
- Balance of Payments equilibrium
- Redistribution of income/wealth (economic equity)
What is the role of financial institutions in the economy?
- To take savings (surplus) and inject it into the economy in the form of loans (deficit)
- Currencies are traded enabling the purchase and sale of items outside the countries.
What does the circular flow model indicate?
- Income
- Spending
- Monetary flow (money)
- Real flow (goods & services)
What are the two types of markets in the circular flow model?
- Goods & Services market
- Factor market
What is the relationship between the real flow and monetary flow?
The value of the real flow equals the value of the monetary flow for a given period.
Fill in the blank: Income = _______ = Production.
Expenditure
What are the three leakages in the circular flow?
- Savings (S)
- Taxes (T)
- Import expenditure (M/Z)
What are the three injections in the circular flow?
- Investment (I)
- Government Expenditure (G)
- Export expenditure (X)
What does it mean if L = J in the circular flow?
The economy is in equilibrium.
What is the equation for total expenditure in the economy?
E = C + I + G + (X – M/Z)
What is GDP?
The total value of all final goods & services produced within the borders of a country within a period of one year.
What is GNP?
The total value of all final goods & services produced by the permanent citizens of a country within a period of one year.
True or False: A trade surplus occurs when exports exceed imports.
True
True or False: A trade deficit occurs when imports exceed exports.
True
