The Circular Flow Of Income

What is Income in comparison to Wealth?

Income is a flow in the economy, whereas wealth is a stock of assets that can be used to generate income

What is the difference between Nominal and Real GDP

Nominal is the actual value of all goods and services produced in an economy in a one year period.

Real GDP is the same, adjusted for inflation

Who owns the Wealth in an economy?

Households, these are the factors of production

How do households receive income?

They provide their factors of production to firms and receive income as a reward.

Rent for Land, Wages for Labour, Interest for Capital, Profit for Enterprise

What do Households do with this Income?

They purchase goods and services from firms

Firms purchase factors of production from households, what do they do with this?

They utilise these resources to produce goods and services

They sell the goods and services to households and receive sales revenue

What do Governments influence in the open circular flow of income?

The Government influences the size of the circular flow through its Taxation T, and Spending Policies G

What does the Financial Sector influence in the open circular flow of income?

Influences the size by providing funds for Investment I and a safe place for households and firms to store their Savings S

What does the Foreign Sector influence in the open circular flow of income?

Globalisation means that the level of exports X and imports M significantly affects the size of the circular flow of income in most countries.

What are the Three ways in order to calculate National Income?

Expenditure Approach

• Nominal GDP = C + I + G + (X-M)

The Income Approach

• National Income = W + R + I + P

The Output Approach

• This approach ads up the value of all finished goods / services produced within the economy each year (national output)

What is the difference between the Value and Volume of GDP

Value is the Monetary Worth

Volume is the Physical Number