The circular flow of income

• What is national income?

  National income is the total value of the goods and services a country produces.
• How is national income measured?

  It can be measured by GDP, GNP, and GNI.
• What is Real GDP?

  Real GDP is the value of GDP adjusted for inflation.
• If the economy grew by 4% and inflation was 2%, what is the real economic growth?

  The real economic growth is 2%.
• What is Nominal GDP?

  Nominal GDP is the value of GDP without being adjusted for inflation.
• Why can Nominal GDP be misleading?

  Because it can make GDP appear higher than it really is.
• What does Gross National Product (GNP) include?

  GNP includes GDP plus income earned from overseas assets minus income earned by overseas residents.
• How does GNP differ from GDP?

  GDP is within a country’s borders, while GNP includes products produced by citizens of a country, whether inside the border or not.
• What is Gross National Income (GNI)?


  GNI is the sum of value added by all producers who reside in a nation, plus product taxes minus subsidies, plus receipts of primary income from abroad.
• What do firms and households do in the circular flow of income?

  Firms and households interact and exchange resources in an economy.
• What do households supply to firms?

  Households supply firms with the factors of production, such as labour and capital.
• What do firms provide to households?

  Firms supply goods and services to households.
• What is the circular flow of income?

  The circular flow of income is the spending and income that circulates around the economy.
• What happens when saving income is removed from the circular flow?

  This is a withdrawal of income.
• What are taxes in the context of the circular flow of income?

  Taxes are a withdrawal of income.
• What constitutes injections into the economy?

  Government spending on public and merit goods, and welfare payments are injections into the economy.
• How does international trade fit into the circular flow of income?

  Exports are an injection into the economy, while imports are a withdrawal from the economy.
• What is full employment income?

  Full employment income is the total output of an economy when unemployment is minimized or at the government target.
• What is the relationship between income, output, and expenditure in the circular flow?

  Income = output = expenditure in the circular flow.
• What is an injection into the circular flow of income?

  An injection is money which enters the economy in the form of government spending, investment, and exports.
• What is a withdrawal from the circular flow of income?

  A withdrawal is money which leaves the economy, such as from taxes, saving, and imports.
• When does the economy reach a state of equilibrium?

  The economy reaches a state of equilibrium when the rate of withdrawals equals the rate of injections.
• What is the relationship between savings and investment in an economy?

  The amount of savings in an economy is equal to the amount of investment.
• How does the savings rate in the UK compare to Japan?

  The UK has a traditionally low savings rate, while Japan has a high savings rate.
• What happens if there are net injections into the economy?

  There will be an expansion of national output.