15 - Circular flow of income

• What does the circular flow of income model illustrate?

  The movement of goods and services between households and firms and their corresponding payments in money terms.
• What are leakages in the circular flow of income?

  Leakages are where money flows out of the circular flow in the form of savings, taxation, and imports.
• What are injections in the circular flow of income?

  Injections are where money flows into the circular flow in the form of investment, government spending, and exports.
• What does gross domestic product (GDP) represent?


  The total level of economic activity carried out in an economy during a given period.
• Who are considered households in the economy?

  Individuals and families within the economy.
• How do households receive income?

  From the factors of production they provide to firms, such as wages for labor, rent for land, and interest for capital.
• What do households do with their income?

  They spend it on goods and services in the product market.
• What is usually the biggest single component of total demand in a modern economy?

  Consumer spending.
• What do firms produce to meet the demands of households?

  Goods and services.
• How do firms generate revenue?


  By selling the products they make to households.
• What do firms use their revenue for?


  To pay for factors of production, such as wages to employees and rent for land.
• What significant role does the government play in the economy?

  It collects taxes, provides public goods and services, and redistributes income through welfare programs.
• How does the government influence income and expenditure flows?

  By providing financial support to firms and injecting demand through spending.
• What is income in the context of households?

  The money that comes into a household.
• What is the main source of income for many households?

  Wages.
• How does the circular flow of income operate?

  Incomes flow into households in reward for the factors of production, which are then used to purchase goods and services from firms.
• What are the three different ways to measure the size of the economy?

  National income, national output, and national expenditure.
• What does the national income method measure?

  All the incomes that flow to households over a period of time.
• What does the national output method measure?

  The value of all the output (goods and services) produced in an economy over a period of time.
• What does the national expenditure method measure?

  All the spending by households, firms, and government over a period of time.
• Why should the three methods of measuring the economy give the same answer?

  Because they are all measuring the same thing.
• What are the routes for money entering the circular flow of income?

  Injections, which include investment, government expenditure, and exports.
• What is investment in the context of injections?

  When firms purchase goods and services to be used in future production.
• What is government expenditure in the context of injections?

  When the government purchases goods and services.
• What are exports in the context of injections?

  When firms sell goods and services abroad, injecting money into their economy.
• What are the routes for money leaving the circular flow of income?

  Leakages, which include savings, taxation, and imports.
• What is savings in the context of leakages?

  When households choose to save their money instead of spending it.
• What is taxation in the context of leakages?

  When the government takes money out of the circular flow.
• What are imports in the context of leakages?

  When households and firms buy from foreign firms, causing money to leave their economy.