circular flow of income

Question 1

define the circular flow of income

Answer 1

model used to represent the flow of money, goods, and services between households, businesses and the gov in an economy

Question 2

describe the process of the circular flow of income

Answer 2

money moves from households to firms for the exchange of goods and services
= money moves back to households as payment for the use of the factors of production in the form of rent, wages, interest and profit
= the more the households spend= the more firms produce

Question 3

describe withdrawals

Answer 3

variables in an economy that leak out of the circular flow of income and leave= reduce the size of national income e.g.
- savings= money saved by houses not spent again= doesn’t flow back to firms
- taxation= money paid by households to the gov= money not spent on goods from firms
- imports= spending by residents on goods and services made abroad

Question 4

define injections

Answer 4

consumption which doesn’t come from households

Question 5

describe examples of injections

Answer 5

• investment= spending by firms on capital stock= means more money flows to households in form of wages= increases spending= increase in investments= rise in spending in the economy= increase productive capacity of economy
• gov spending by central or local gov
• exports are spending of foreigners on goods and services made in the UK

Question 6

describe balances between injections and withdrawals

Answer 6

• injections equal to withdrawals= economy at equilibrium
• injections greater than withdrawals = economic growth
• withdrawals greater than injections= negative economic growth

Question 7

define wealth

Answer 7

sum of all assets in an economy= stock concept

Question 8

define income

Answer 8

amount of money earned during a period= flow concept

Question 9

effect of wealth on a country

Answer 9

• high wealth= high income= wealth can produce output= produce an income

Question 10

describe the wealth effect

Answer 10

if a household’s wealth increases, they feel more confident to spend more= allowing more money to enter the circular flow of income= increases income in the economy

Question 11

how do households contribute to circular flow of income

Answer 11

provide labour to businesses in exchange for wages, salaries and other forms of income
they purchase goods and services from businesses= creates revenue for businesses

Question 12

main components of circular flow of income

Answer 12

gov, foreign sector, households and businesses

Question 13

real- world examples of circular flow of income

Answer 13

families buying groceries from local supermarket
business exporting goods to foreign country
gov providing healthcare services to citizens

Question 14

how does gov contribute to circular flow of income

Answer 14

collects taxes from households and businesses
= uses revenue of tax to provide goods and services to the public
gov provides transfer payments like welfare and social security to households

Question 15

how does the circular flow of income help us understand the economy

Answer 15

understand how diff parts of economy are interconnected and how money, goods etc flow between them
= better understand how changes in one part of economy can affect other parts of economy

Question 16

ways to measure economic growth (GDP)

Answer 16

• measure final value of output of goods and services provided in a year
• add up all factor incomes earns over a year eg all profit, interest, salaries etc
• measure total expenditure eg consumer spending, investment, gov spending and net exports