Circular flow of income

Question 1

National income

Answer 1

The value of the output, expenditure, or income of an economy over a period of time.

Question 2

Closed economy

Answer 2

an economy where there is no foreign trade.

Question 3

Open economy

Answer 3

An economy where there is trade with other countries

Question 4

Wealth

Answer 4

A stock of assets which can be used to generate a flow of production or income. For example, physical wealth such as factories and machines is used to make goods and services.

Question 5

Income

Answer 5

Rent, interest, wages and profits earned from wealth owned by economic actors.

Question 6

Circular flow of income

Answer 6

A model of the economy which shows the flow of goods and services and factors and their payments around the economy.

Question 7

What does the circular flow of income model show?

Answer 7

Used to show that there are three ways of measuring the level of economic activity:
National output (O) – this is the value of the flow of goods and services from firms to households.
National income (E) – this is the value of spending by households on goods and services.
National income (Y) – this is the value of income paid by firms to households in return for land, labour and capital.

Question 8

Injections

Answer 8

In the circular flow of income, spending which is not generated by households including investment, government spending and exports.

Question 9

Withdrawals and leakages

Answer 9

In the circular flow of income, spending by households which does not flow back to domestic firms. It includes savings, taxes and imports.

Question 10

State the three injections

Answer 10

• Investment - spendings by firms on new capital equipment. It is also spending on stocks (or inventories) of goods which are used in production process.
• Government spending – spending by central and local government as well as other government agencies
• Exports – spending by foreigners on goods and services made in the UK

Question 11

State three withdrawals

Answer 11

• Savings by households and firms
• Taxes paid to the government – take money from both households and firms
• Imports from abroad – bought by both households and firms, the money paid in taxes then does not flow back round the circular flow

Question 12

Circular flow of income model in equilibrium

Answer 12

Injections must equal withdrawals – when this happens output expenditure and income flowing round the circular flow remain the same.

Question 13

Explain the effects of injections being greater than

Answer 13

withdrawals in the circular flow of income model
National income will rise to reflect the greater spending.

Question 14

Explain the effects of injections being less than withdrawals in the circular flow of income model

Answer 14

Spending will fall.