2.4.1 Circular flow of income

What is the difference between income and wealth?

Income refers to the money an individual earns through work, investments, or other sources. It’s often measured over a period of time (e.g weakly/ monthly).

Whereas wealth refers to the total value of a person’s assets (such as property, investments, cash)minus their debts. It’s a measure if net worth, not just income.

Wealth can accumulate overtime, while income is earned on a more regular basis

Define income

The money or earning that an individual or household receives regularly over a specific period, typically on a recurring basis. It represents the flow of money into one’s finances (money earned) during a specific time frame

Define wealth

(AKA net worth), it is the total value of an individual’s or household’s assets (what they own) minus their liabilities (what they owe).

It represents the stock of assets accumulated over time and is a snapshot of a person’s financial situation at a particular point. In time.

Give examples of income

Wages, rent, interest, dividends

Give examples of wealth

Houses, art, antiques, shares, bonds, savings

What is the circular flow of income model?

Illustrates how money and goods/ services circulate within the economy between households, businesses and the government.

What does the circular model show?

Interconnections between different economic agents and highlights the floe of income and expenditure

what are households in the circular flow of income and what is its role?

• individuals and families within the economy

• Households receive income from the factors of production they provide to firms(e.g wages for labour, rent for land, interest for capital)

• The income is then spent by households on goods and services in the production market

what are business (firms) in the circular flow of income and what are their roles?

Firms produce goods and services to meet the demand of households.

They hire labour, use capital and natural resources, and sell the products they make to households.

Firms receive revenue from the sale of goods and services

They use this revenue to pay for factors of production ( e.g wages to employees, rents for land).

what is the government in the circular flow of income and what is its role?

• the government plays a significant role in the economy

• It collects taxes from households and businesses, provides public goods and services (like infrastructure, defence, health, transport and education), and may also redistribute income through various welfare programmes

• It provides financial support to firms, influencing both income and expenditure flood and it also injects demand through spending

What is a recession ?

Negative growth for at least 2 consecutive quarters