Circular Flow of Income (Topic 1)

Question 1

What is the circular flow of income?

Answer 1

It is a model showing the basic relationships that occur in a market economy and where the injections and leakages are.

Question 2

Leakages are:

Answer 2

Any money which leaves the economy. Savings (S), taxation (T) and imports (M).

Question 3

Injections are:

Answer 3

Any money put into the economy. Investment (I), government expenditure (G) and exports (X).

Question 4

What is the difference between a product and factor market?

Answer 4

A factor market is a market that trades the factors of production (land, labour, capital and enterprise) and a product market trades g+s.

Question 5

What is economic growth?

Answer 5

Economic growth refers to a situation where there is a sustained increase in a country’s productive capacity over time. This is commonly measured by the percentage increase in real GDP.

Question 6

What is the formula for GDP/AD?

Answer 6

GDP= C+1+G+(X-M)

Question 7

What are the five sectors of the economy?

Answer 7

• Households
• Firms
• Government
• Financial
• Overseas