Circular flow of income

• What is the circular flow of income used for in economics?

  It is a model to understand the economy and derive conclusions about economic growth.
• What are the two important conclusions derived from the circular flow of income model?

  How to look at economic growth and how to measure economic growth.
• What are the two fundamental economic agents in the simple economy model?

  Households and firms.
• What do households provide to firms in the circular flow of income?

  Factors of production in the form of land, labor, capital, and enterprise.
• What do firms do with the factors of production provided by households?

  They combine them to produce goods and services.
• What do households receive in return for providing factors of production?

  Factor incomes from firms.
• What is the reward for labor in the circular flow of income?

  Wages and salaries.
• What is the reward for land in the circular flow of income?

  Rent.
• What is the reward for entrepreneurship in the circular flow of income?

  Profit.
• What is the reward for capital in the circular flow of income?

  Interest.
• What do households do with the factor incomes they receive?

  They spend them on goods and services made by firms.
• What does the circular flow of income model illustrate?

  The movement of spending and income throughout the economy.
• What two sectors are ignored in the simplified circular flow of income model?

  The government and the international sector.
• What are the three leakages from the circular flow of income?

  Savings, taxation, and imports.
• What are leakages in the context of the circular flow of income?

  Ways in which income can exit the economy and not be spent on domestic goods and services.
• What are injections in the circular flow of income?

  Ways in which money can enter the economy outside of consumer expenditure.
• What are the three types of injections into the circular flow of income?

  Investment, government spending, and exports.
• What is the technical definition of investment in the context of the circular flow of income?

  When firms spend on capital goods.
• How can government spending be represented in the circular flow of income?

  It is denoted by the letter G.
• How can exports be represented in the circular flow of income?

  It is denoted by the letter X.
• What is the relationship between injections and leakages in terms of economic growth?

  If injections are greater than leakages, economic growth is rising.
• What happens when the level of injections is less than the level of leakages?

  More money is exiting the economy than entering it, leading to decreasing economic growth.
• What is macroeconomic equilibrium in the context of injections and leakages?

  It occurs when injections and leakages are equal to each other.
• What does GDP stand for?

  Gross Domestic Product.
• How can GDP be measured using the circular flow of income?

  By measuring any one of the three components: output, income, or expenditure.
• What is the output method of calculating GDP?

  It looks at the final value of all goods and services produced in an economy in a year.
• What is the income method of calculating GDP?

  It adds up all the factor incomes earned in an economy in a year.
• What is the expenditure method of calculating GDP?

  It adds up total expenditure on a country's goods and services in a year.
• What is the equation for total expenditure in the context of GDP?

  C + I + G + (X - M).
• What does it mean that output, income, and expenditure are equal to each other?

  They all measure the same circular flow of income.
• How can a transaction in the economy illustrate the relationship between spending, output, and income?

  Spending equals the value of the output, which becomes the income for the seller.
• What is the significance of the circular flow of income model in economics?

  It helps to understand economic growth and measure it effectively.
• What is the final takeaway from the circular flow of income model?

  It provides a model and conclusions about economic growth.