1.1 The Circular Flow of Income

define the circular flow of income

shows the movement of spending and income through the economy

what does it explain

how the macro economy works

what are the 3 economic agents

households
governments
firms

what do households own

the wealth of the nation

what factors of production do households own

Land
Labour
Capital
used to make goods and services

what do households supply these factors of production (CELL) to firms in return for?

rent
wages
interest

what do households use this monetary return for

to buy goods and services

what do firms produce

goods and services

what do firms hire from households

the factors of production, namely labour

what do firms use these hired factors of production for?

to produce goods and services for sale back to the households

what are withdrawals from the circular flow

the flow of money into an economy is falling
savings
taxation
imports

what are injections into the circular flow

additions of extra spending into the circular flow of income
investment
government spending
exports

one main indicator of a nation’s economics performance

its level of output

how can output be measured

in terms of GDP
measure of national income

definition of GDP

value of all goods and services produced by the factors of production based in a country during a particular year

what are the three ways of measuring GDP

output measure
expenditure measure
income measure

output measure definition

value of the goods and services produced by all sectors of the economy

expenditure measure definition

value of the goods and services purchased by households and by governments

income measure definition

the value of the income generated in an economy

are all three of these outputs equal?

yes
national output = national income = national expenditure