Circular Flow of Income

Imports, Exports, Foreign sector, banking sector, government sector, resource market, product market, Factor income, wages, rent, income, interest, capital, investment, savings, leakages, injections, taxes, gov spending

Draw the Circular Flow in Income diagram

What are all the leakages in the CFOI? Why?

• Savings (money saved is money not spent)

• Taxes (reduction in disposable income, given to government rather than spending on goods and serivices)

• Imports (money goes toward other economies and countries, exits the CFOI)

What are the Injections in the CFOI? Why?

• Investments (banking sector loans household savings for firms to invest in capital, the firms pay interest to the bank. The money belongs to households so banks gie interest payments for the privelidge of lending households savings)

• Government Spending (taxes are used on the public and the money goes towards goods and services for the state)

• Exports (other countries purchase our goods and services and pay us for our goods and services)

What is the Income Approach?

Total Income earned by households in a nation during a year?Wha

What are the 4 types of income and where do they come from?

• Land- rent

• Labour- wages

• Capital- interest

• Enterprise- profit

What is the Expenditure approach?

Total spent on goods and services produced in a nation by households, firms, government and foreigners.

What do these stakeholders spend money on?

• Households- consumption (C)

• Firms- investment (I)

• Government- government spending (G)

• Foreigners- exports minus imports (X-M)

What does Real GDP mean?

Real Gross Domestic Product. How much overall the economy is producing.W

What are the different sectors and markets within the CFOI?

• Government sector

• Banking sector

• Foreign sector

• Product market

  • Resource market

What is the difference between Income and Wealth?

Income- all the money you earn in a year

Wealth- the sum of all your assets

What can we use to measure GDP?

National income= national expenditure= national output

What does Rent + Wages + Interest + Profit make?

Total Income/GDP

What does C+I+G+(X-M) make?

Total expenditure/GDP

What is the resource market?

Where firms act like buyers and households selll their Factors of Production for a Factor Income.

What is a product market?

Where households and foreigners are the buyers and firms sell their final goods and services.