Circular Flow, GDP & National Accounts – Review Flashcards

29 question-and-answer flashcards covering leakages and injections, GDP vs. GNP, the circular-flow model, financial sector roles, GDP calculation methods, and real vs. nominal GDP concepts.

What is a leakage in the circular-flow model, and name three common leakages?

A leakage is money that leaves the spending stream; typical leakages are Savings (S), Taxes (T) and Imports (M).

What is an injection in the circular-flow model, and name three common injections?

An injection is money that enters the spending stream; main injections are Investment (I), Government spending (G) and Exports (X).

According to the leakages–injections framework, when is the economy in equilibrium?

When Leakages equal Injections (L = J).

If injections exceed leakages (J > L), what happens to economic growth?

Economic growth accelerates/expands.

If leakages exceed injections (L > J), what happens to economic growth?

Economic growth slows down/contracts.

How is Real GDP defined in terms of prices?

GDP measured at constant prices; inflation has been removed.

How is Nominal GDP defined in terms of prices?

GDP measured at current prices; inflation effects are included.

State the expenditure formula for GDP in an open economy.

GDP = C + I + G + (X − M).

What is the key difference between GDP and GNP?

GDP counts production within a country’s borders; GNP counts production by that country’s permanent citizens, regardless of location.

Define a closed economy.

An economy with no foreign trade; it has neither imports nor exports.

Define an open economy.

An economy that trades with the rest of the world and therefore has imports and exports.

Name the four main participants in the 4 × 2 × 2 circular-flow model.

Households, Firms, Government, Foreign sector.

What are the two markets represented in the 4 × 2 × 2 model?

The Factor market and the Goods market.

What two types of flows are shown in the circular-flow diagram?

Real flow (goods, services, and factors) and Monetary flow (money payments).

What is the primary role of the financial sector in the circular flow?

To intermediate savings and investment, channeling funds among all participants (e.g., via banks, insurance companies, the JSE, the Reserve Bank).

What distinguishes the capital market from the money market?

Capital market provides long-term finance (shares, bonds); money market provides short-term finance (treasury bills, bank acceptances, debentures).

What turns the four-sector model into the five-sector model?

Adding the Financial Sector to the four-sector (households, firms, government, foreign) model.

Why must double counting be avoided in the production method of GDP?

Including the same value more than once overstates GDP; only value added at each stage should be counted.

In principle, how is GDP (P) calculated using the production method?

Sum of value added by the primary, secondary, and tertiary sectors plus taxes on goods minus subsidies on goods.

Which incomes are summed in the income method of GDP?

Wages (remuneration), Rent, Interest, and Profits (w + r + i + p), plus depreciation and relevant taxes minus subsidies.

Which GDP calculation method must students be able to compute for exams?

The Expenditure method (GDP = C + I + G + (X – M)).

What is the purpose of the “reserve item” in national-accounts tables?

It is a statistical adjustment used to ensure that the production, income, and expenditure measures of GDP are numerically equal.

Provide the formula for calculating the real GDP growth rate.

Growth = [(Current Real GDP − Previous Real GDP) / Previous Real GDP] × 100.

Why do governments grant subsidies, and how are subsidies treated in GDP calculations?

Subsidies help firms keep prices low to remain competitive; in GDP at market prices, subsidies are subtracted (they reduce the market price).

Name the three broad sectors considered in the production method of GDP.

Primary sector, Secondary sector, and Tertiary sector.

What does the GDP (I) identity w + r + i + p stand for?

Wages, Rent, Interest, and Profits—the four major income components summed in the income method.

What flows through the factor market in the circular flow?

Factors of production from households to firms and the corresponding incomes paid to households.

What flows through the goods market in the circular flow?

Finished goods and services from firms to households, government, and foreign buyers, along with the expenditure paid for them.