Circular Flow of Income - Lecture Notes

These flashcards cover key concepts, definitions, and relationships within the Circular Flow of Income, as outlined in the lecture notes.

What does the Circular Flow of Income describe?

The continuous movement of money, goods, and services between different sectors of the economy.

What are the key assumptions of the Circular Flow of Income?

1. Households own all factors of production. 2. Firms produce goods and services. 3. There is no government or foreign trade in the basic model. 4. Income equals expenditure equals output.

What is equilibrium in the Circular Flow of Income?

Equilibrium occurs when total injections equal total leakages, ensuring the economy's income and output remain stable.

What are injections in the context of the Circular Flow of Income?

Additions to the economy’s income stream from investment (I), government spending (G), and exports (X).

What happens when injections are greater than leakages in an economy?

Income rises.

List three forms of leakages in the Circular Flow of Income.

Savings (S), taxes (T), and imports (M).

What is represented in a two-sector model of the Circular Flow of Income?

The relationship between households and firms, illustrating income and expenditure flow.

How does government expenditure affect the flow of income?

Government expenditure serves as an injection, increasing the overall income flow in the economy.

What occurs if total withdrawals exceed total injections?

National income and output decrease, leading to contraction in economic activity.

Illustrate the four-sector Circular Flow of Income model.

The model includes households, firms, government, and the foreign sector (exports and imports) with arrows indicating flows of income and goods.