Circular flow of income

• What does the circular flow model illustrate?

  How money flows around the economy
• How do households receive income?

  Through wages, salaries, and investments
• What do households do with the income they receive?

  They buy goods and services supplied by businesses
• What inputs do businesses hire to make products?

  Land, labor, and capital inputs
• What does the external sector include in the circular flow model?

  Imports and exports
• What do financial institutions do in the economy?

  They provide cash to firms and accept deposits from households
• What is the purpose of households putting money into banks?

  To save and earn interest on their savings
• What are the components of money flow in the circular flow model?

  • Money in: Factor incomes, Exports, Tax, Capital investment
  • Money out: Imports, Experience, Taxation, Savings
• What are the injections and leakages in the circular flow model?

  Injections:

  • Investments
  • Exports of goods and services
  • Government spending

  
  

  Leakages:

  • Savings
  • Imports of goods and services
  • Taxation
• What is the multiplier effect in the circular flow model?

  It is when the actual change in national income is greater than the initial injection
• What happens when the government gives a firm £50 million to invest?

  It becomes new income in the circular flow
• How does money leak out of the circular flow after an injection?

  Through withdrawals, taxes, interest, wages, and dividends
• Why might a firm not gain £50 million in net worth after receiving £50 million in cash?

  Because wealth includes total asset value, not just liquid cash
• What is the difference between cash and wealth for a business?

  Cash is liquid money, while wealth is the total value of all assets
• What are injections in the circular flow of income?


  Spending power entering the circular flow resulting from investment, government spending, and exports.
• What are leakages in the circular flow of income?


  Spending power leaving the circular flow resulting from savings, taxation, and imports.
• What does the circular flow of income model represent?


  A model of the economy showing the flow of goods and services, factors of production, and money.
• What is macroeconomic equilibrium?


  It is where the rate of withdrawals equals the rate of injections.
• What are monetary flows in the economy?


  The flow of money, such as from taxes or for consumption.
• What are physical flows in the economy?


  The flow of a good or service.
• What is national income


  National income is the total value of the goods and services a country produces in one year.
• How can national income be 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 economic growth be misleading?


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



  GNP is the market value of all products produced in an annum by the labour and property supplied by the citizens of one country.
• How does GNP differ from GDP?



  GNP includes products produced by citizens of a country, whether inside the border or not, while GDP is within a country's borders.
• 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 does the circular flow of income represent?



  The circular flow of income represents the interaction and exchange of resources between firms and households in an economy.
• What happens to income when saving occurs in the circular flow of income?



  Saving income removes it from the circular flow, acting as a withdrawal of income.
• What are taxes in the context of the circular flow of income?



  Taxes are a withdrawal of income from the circular flow.
• What are injections into the economy?



  njections are government spending on public goods, merit goods, and welfare payments.
• How do exports and imports affect 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 an injection into the circular flow of income?



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



  A withdrawal is money that leaves the economy, such as taxes, saving, and imports.
• When does the economy reach a state of equilibrium in the circular flow of income?



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



  The amount of savings in an economy is equal to the amount of investment.
• What is the multiplier effect

  When injections exceed withdrawls