Circular Flow Of Income

• What does the circular flow of income illustrate?

  How income flows through the economy
• What is the focus of macroeconomics?

  The whole economy
• Who owns all the factors of production in the circular flow model?

  Households
• What do households earn from selling factors of production?

  Rent, wages, and profit
• What do households spend their earned money on?

  Goods and services produced by firms
• What are the three methods to measure GDP?

  1. Income method: sum of all incomes
  2. Output method: value of final output
  3. Expenditure method: total spending in the economy
• What is the difference between income and wealth?

  Income is regular money received; wealth is asset accumulation
• Why might a high-income individual not be wealthy?

  They may spend all their earnings
• What happens if withdrawals and injections are ignored in the circular flow model?

  All methods should theoretically yield the same GDP figure
• What does the output method exclude when measuring GDP?

  Intermediary goods
• What is aggregate demand also known as?

  Expenditure method
• What do households spend their earnings on?

  Goods and services produced by firms
• What is the main focus of macroeconomics?

  The whole economy
• What does the circular flow of income illustrate?

  How income flows through the economy
• What are the three missing components in the circular flow of income?

  Withdrawals and injections
• What are the types of injections in the circular flow of income?

  • Investment by firms
  • Government spending
  • Exports from foreign buyers
• What are the types of withdrawals in the circular flow of income?

  • Savings by households and firms
  • Taxes collected by the government
  • Imports of foreign goods and services
• How do injections impact the circular flow of income?

  They increase the overall income in the economy
• What is the definition of income?

  Money received on a regular basis
• How do withdrawals affect the circular flow of income?

  They decrease the overall income in the economy
• What is the definition of wealth?

  Accumulation of assets
• Can a person with high income be considered wealthy?

  No, they may spend all their earnings
• What is the income method of measuring GDP?

  Sum of all incomes received in a year
• Who owns all the factors of production in the circular flow model?

  Households
• What do households earn by selling factors of production?

  Rent, wages, and profit
• What does the output method measure?

  Value of final output produced
• What is the expenditure method of measuring GDP?

  Sum of all spending on goods and services
• How does a recession in the US affect global economies?

  • US imports decrease
  • Exports from other countries decline
  • Global interconnectedness amplifies effects
• What happens to Chinese firms if US imports decrease?

  Lower incomes for Chinese firms
• How does a decrease in demand for Chinese exports affect Vietnam?

  Lower incomes for Vietnamese workers
• What is the significance of globalization in the economy?

  • Economies are interconnected
  • Events in one economy affect others
  • Trade relationships influence income flows
• What is GDP?

  Value of all goods and services produced
• How does a decrease in US imports affect China?

  It leads to lower incomes for Chinese firms
• How much did the US import from China in 2019?

  $450 billion
• What is the significance of globalization in the context of the circular flow of income?

  • Economies are interconnected
  • Events in one economy affect others
  • Example: US recession impacts global trade