The circular flow of income

The circular flow of income

model that shows how money and resources flow between households and firms in a simple economy

What are the 2 main agents in a closed economy

households and firms

what are real flows

households provide the factors of production including land, labour, capital and enterprise to firms. Firms provide goods and services to households

what are money flows

Firms pay income (in the form of rent ,wages, interest and profit to households.

Firms provide goods and services to households

draw a simple circular flow diagram

What are injections

additions of new money into the circular flow

what are the 3 main injections

investment

government spending

exports

define investments

(I) spending by firms on capital goods

What is government spending

(G) spending by the state on public goods and services

What are exports

(X) the revenue from oversea buyers purchasing domestic goods

what are withdrawls

(W) also known as leakages

money leaving the circular flow

what are the 3 main examples of withdrawls

taxation (T)

savings (S)

Imports (M)

what are savings

household income that is not spent

what is taxation

money paid to the government

what are imports

money spent on goods and services

When is national income in equlibrium

when total injections equal total withdrawls

IF J > W

the circular flow expands and the economy grows

if W <J

the circular flow contracts and the economy grows

what is national income

the total value of output, expenditure and income generated in an economy over a period of time, usually a year

what are the three methods to measure national income

• output method

• input method

• expenditure method

what is the output method

the value of all goods and services produced

what is the input method

the sum of all incomes earned, including wages, rent, interest and profit

What is expenditure

the sum of all spending using the expression

what is income

a flow of money recieved over a period of time such as wages or interest

what is wealth

a stock of assets that generate income, such as propety or savings