Theme 2: National Income Flashcards
(25 cards)
What are the 2 ways of measuring how rich an economy is?
1) Income
2) wealth
What is income?
the flow of money received by a person or economy each year.
What is wealth?
The sum, or stock, of all your assets added up
What are assets?
Items that you own
Draw the circular flow of income
What do firms buy in the circular flow of income?
Factors of production
What do households buy in the circular flow of income?
They spend the factor incomes on goods and services produced by firms
What is the circular flow equation?
That income = expenditure = output
Why does national income = national expenditure = national output?
The total spending (national expenditure) from households across the economy must come from the total income (national income) they earn.
Households spend (national expenditure) on the total output (national output) of goods and services produced by firms in the economy.
Within the Circular Flow of Income what is meant by Factor Incomes?
Money paid by firms to households in return for factors of production.
What is Real GDP?
A measurement of the value of an economy’s national output, adjusted for inflation: (the total value of the goods and services the economy produces in a year, adjusted for inflation.)
What are leakages/withdrawals within the Circular Flow of Income?
A leakage (also known as a withdrawal) is when money leaks out of the circular flow.
What are the 3 different types of leakages/withdrawals from the circular flow of income?
1) Savings
2) Imports
3) Taxes
What are savings within the Circular Flow of Income?
Disposable income that is not spent by households. Savings are a leakage.
What are imports within the Circular Flow of Income?
Spending on foreign goods and services. Imports are a leakage.
What are taxes within the Circular Flow of Income?
Money paid to the government by consumers, firms and workers. Taxes are a leakage.
What are injections within the Circular Flow of Income?
An injection is when money is injected into the circular flow.
What are the different types of injections into the circular flow of income?
1) Government spending
2) Investment
3) Exports
What is government spending within the Circular Flow of Income?
When the government injects money into the economy by spending on schools, teachers, hospitals, doctors etc.
What are Exports within the Circular Flow of Income?
When firms export goods abroad, foreign consumers pay us, so money is injected into our economy.
What is investment within the Circular Flow of Income?
Banks use our savings to invest back into our firms, injecting money into the circular flow.
Describe the Circular flow model (4 marks)
- Firms buy factors of production, like labour and land, from households.
- In return, they pay households factor incomes, like wages and rent.
- Households then spend their factor incomes on firms in exchange for the goods and services.
What happens when injections > withdrawals?
GDP is increasing as more money is entering the economy.
What happens when withdrawals > injections?
GDP is decreasing as more money is leaving the economy.
