IB Economics SL — Macro 1: Circular Flow

What is macroeconomics?

The study of the economy as a whole, including economic growth, unemployment, inflation and government economic policy.

What does the circular flow of income model show?

How income, spending and resources flow between different sectors of the economy.

What are the two sectors in the simplest circular flow model?

Households and firms.

What do households provide to firms, and what do they receive?

Households provide factors of production and receive income: wages, rent, interest and profit.

What do firms provide to households, and what do they receive?

Firms provide goods and services and receive households' consumption expenditure.

Why are national output, national income and national expenditure equal in principle?

Spending on final output generates revenue that becomes income for those involved in production, so the three approaches measure the same economic activity.

What are leakages from the circular flow?

Income not spent on domestically produced goods and services: saving (S), taxation (T) and spending on imports (M).

What are injections into the circular flow?

Spending added to the circular flow: investment (I), government spending (G) and spending on exports (X).

When is the circular flow of income in equilibrium?

When planned injections equal planned leakages: I + G + X = S + T + M.

What happens when planned injections and leakages are unequal?

If injections exceed leakages, national income tends to rise. If leakages exceed injections, national income tends to fall.