Chapter 3

Circular Flow Model

Illustrates financial and real flows among the three sectors of the economy: business, household, and government.

Flow of Income

Amount of income over a given period of time that is generated from various sources, including wages, investments, and business profits.

Stock of Money

quantity of money at a specific point in time.

Velocity of Money

The number of times the stock of money is spent in a year on final goods.

Leakage

Any flow of income that is diverted out of the circular flow.

Injection

Any spending flow that is not dependent on the current level of income.

Consumption Spending

Households' payment for goods and services.

Savings (S)

The portion of income that is not spent on consumption.

Gross Domestic Product (GDP)

The total value of all final goods and services produced in a country.

Net Exports (Xn)

Difference between a country’s exports and imports.

Consumption (C)

Spending by households.

Gross Investment (Ig)

Spending by businesses on capital goods.

Government Spending (G)

Spending on goods and services by the government.

Personal Income

Income received by individuals before taxes.

Disposable Income

Net income that individuals take home after taxes.

Transfer Payments …

Payments made by the government without any goods or services provided in return.

Underground Activities

Illegal and unreported activities not included in GDP.

Human Capital

Accumulated skills and knowledge of individuals.

Economic Growth

An increase in real GDP per capita or capacity to produce

Real GDP

GDP measured in terms of prices prevailing in a given base year.

Nominal GDP

GDP valued at current prices without adjustment for inflation.

Labor Productivity

Output produced per unit of labor.

Depreciation

Reduction in value of capital goods over time.

Factor Market

Market for the factors of production.

Product Market

Market for consumer goods and services.

Income Method (GDP)

Calculating GDP by adding the incomes earned by factors of production.

Expenditure Method (GDP)

Calculating GDP by summing all expenditures made in the economy.

Imports (IM)

Goods and services bought from other countries.

Exports (X)

Goods and services sold to other countries.

Tax Revenue

Income received by the government through taxes.

Net Tax Revenue

Taxes less transfer payments.

Investment (I)

Spending on new capital goods.

Transfer Payments

Payments made by the government to individuals, such as social security.

Economic Growth Rate

The rate at which a nation's GDP increases from one year to another.

Quality of Life

The general well-being of individuals in a society, including factors such as income and health.

Disposable Income and Consumption Relationship

Disposable income influences the level of consumption in an economy.

National Income

Total income earned by a nation's resources.

Aggregate Expenditures (AE)

Total spending in the economy represented by the formula C + Ig + G + Xn.

Investment Spending

Spending by businesses for capital goods that will be used for future production.

Education Quality

Standard or level of education in a society that impacts economic growth.

Economic Growth Benefits

Including improved living standards and better health services.

Circular flow Businesses and Households

Businesses sell to the households, households provide service factors to the business.

Households pay for goods and services (consumption spending) and sell factor services to the business sector and earn income. Using this income they can pay for the goods and services received from the business sector

Income

the sum of all earnings from economic transactions or the sum of all spending