Circular Flow of Income Flashcards
What is the Circular Flow of Income?
It is the way in which money moves through the economy.
Explain Circular Flow of Income?
Households provide factors of production to firms who then use this to provide goods and services for households.
Firm will give a reward to households through factor incomes. EG: wages
Households will then spend this money on goods and services.
This then goes in a cycle.
What are some leakages into the Circular Flow of Income and explain?
Savings, Imports, Taxation
Some may save their money and so this money dosent carry on the cycle.
Gov will tax these factor incomes and take money out of the cycle.
Money may be spent on imports rather than domestic products.
What are some injections into the Circular Flow of Income?
Investment, Gov Spending, Exports
Firms can spend their money, known as investments. This brings money into the cycle.
Gov can also spend on goods and services, bringing money in.
Foreigners may export from us bringing money into the cycle.
What is the relationship between injections, leakages, and economic growth?
If injections are greater than leakages, there will be economic growth.
If leakages are greater than injections, economic growth decreases.
What is the GDP method and explain the equation?
GDP can be found by measuring goods and services produced or factor incomes or consumer expenditure. Either will give us GDP.
Because it is the same circular flow of income and all the money follows this route, Output=Expenditure=Income
