Topic 2.2 - The circular flow of income

What is the central flow of income?

The main part of the circular flow of income measuring the flows between firms and households

What are leakages?

Any flow of income that takes away and reduces the central flow

What is another word for leakages?

Withdrawals

What is factor income?

Money earnt by providing factors of production to firms

What are injections?

Any flow of income that adds and increases the central flow

What is the circular flow of income?

A model of the economy, showing how income moves around the various sectors

What is income?

Money received through work or financial investment

What is wealth?

The total value of the assets you own

How can you use wealth to provide income?

Bu selling your assets

How can you use income to provide wealth?

Buying shares

What are shares the same as?

An asset

What are 4 examples of wealth?

1. House

2. Picasso painting

3. Savings in a bank account

4. Shares in a company

What are 4 examples of income?

1. Interest from a bank account

2. Pension

3. Rent received from a tenant

4. Wages

What are flows?

Different types of income movements

What are the 5 sections of the circular flow of income model?

1. Households

2. Firms

3. Banks

4. Governments

5. International

What are the 8 flows in the circular flow of income model?

1. Export spending

2. Factor incomes

3. Government spending

4. Import spending

5. Investment

6. Saving

7. Spending on goods and services

8. Taxation

Where does the flow of spending on goods and services leave from and where does it end up?

From households to firms

Where does the flow of factor incomes leave from and where does it end up?

Firms to households

Where does the flow of investment leave from and where does it end up?

Banks to firms

Where does the flow of saving leave from and where does it end up?

Households to government

Where does the flow of government spending leave from and where does it end up?

Governments to households

Where does the flow of taxation leave from and where does it end up?

Households to governments

Where does the flow of import spending leave from and where does it end up?

Households to international

Where does the flow of export sending leave from and where does it end up?

International to firms

What are the 3 injections?

1. Investment (I)

2. Export spending (X)

3. Government spending (G)

What are the 3 withdrawals?

1. Savings (S)

2. Taxation (T)

3. Import spending (M)

What are the 2 flows between households and firms called?

The central flow

What are the 2 things 6 other flows that involve banks, governments and international do?

1. Add income to the central flow e.g. income of households and firms which is an injection

2. Take away income from the central flow which is a withdrawal

What is national income?

The amount of money earned by all its factors of production within a certain time period and represents the total value of all goods and services produced in the economy during that time

How is national income measured?

By governments and economic institutions to assess the country’s economic performance and inform policy decisions like resource allocation and tax