The Five Sector Circular Flow Model of Income (Terms)

• What is the household sector of the economy made up of?

  Consumers who hold economic resources such as land, labor, capital, and enterprise
• What role does the firms sector play in the economy?

  It includes businesses that use household resources to produce goods and services
• What is the significance of the government sector in the economy?

  It plays a significant role in the circular flow of income
• What does the financial sector refer to?

  Financial institutions like banks that act as intermediaries between savers and borrowers
• What does the overseas sector consider?

  The global influences on a nation’s economy, including trade
• What is production in economic terms?

  The process by which firms use resources from households to create goods and services
• How is consumption defined in economics?

  The process by which households use their income to purchase goods and services
• What does interdependence refer to in the economy?

  The mutual reliance between consumers and businesses, where each depends on the other for survival and income
• What does savings (S) refer to in economic terms?

  Putting money away for later use, acting as a leakage from the circular flow of income
• How does taxation function as a leakage in the economy?

  It reduces the amount of money in the circular flow by collecting taxes from individuals and businesses
• What is investment (I) in the context of the economy?

  When money is borrowed and used to expand or grow a business, acting as an injection into the circular flow of income
• What do exports (X) refer to in economic terms?

  Australian businesses selling goods or services to overseas entities, acting as an injection into the circular flow of income
• What do imports (M) refer to?

  Australians buying goods or services from overseas, acting as a leakage from the circular flow of income
• What is government expenditure in economic terms?

  When the government spends money raised through taxation on infrastructure, welfare, education, and health
• What is the circular flow of income model?

  • A model used by economists
  • Measures changes in economic activity
  • Compares injections and leakages within an economy