The Circular Flow of Income

Who are the 2 Economic Agents within the economy?

1. Households

2. Firms

What does the circular flow of income dictate?

The movement of spending and income throughout the economy

Explain the circular flow of income

1. Households provide firms the four factors of production: capital, enterprise, land, and labour. Firms then use these factors of production to produce goods and services.

2. In return for the factors of production, firms pay households factor incomes(the benefits of each factor of production).

3. Households then use the factor income to purchase goods and services in the form of consumer expenditure.

What is the benefit of capital?

Interest

What are the benefits of enterprise?

Profits

What is the benefit of land?

Rent

What is the benefit of labour?

Salaries/wages

What two fundemental parties/aspects are exempt from the circular flow of income?

1. The government

2. The international sector

What are withdrawals/leakages?

When money is leaving the economy without being spent on domestic goods and services

What are 3 examples of withdrawals?

1. Savings(S)

2. Taxation(T)

3. Imports(M)

What are injections?

When money enters the economy outside consumer expenditure on domestic products

What are 3 examples of injections?

1. Investment

2. Government spending

3. Exports

What is investment?

When firms spend money on capital goods

What are exports?

Foreign consumers purchasing UK products

What are imports?

Domestic consumers purchasing foreign products

Formula for withdrawals

S + T + M

Formula for injections

I + G + X

What happens to economic growth whe injections are greater than withdrawals?

More money would be entering the economy than leaving it; therefore, economic growth would be increasing

What happens to economic growth when withdrawals are greater than injections?

Less money would be entering the economy than leaving it; therefore, economic growth would be decreasing

What happens to economic growth when injections equal withdrawals?

When the amount of money entering the economy is the same as the amount leaving it, the economy would be in macroeconomic equilibrium.

What does GDP stand for?

Gross domestic product

What is GDP?

1. GDP is the measure of the total value of all the goods and services produced in the economy in a single year

2. GDP is an indicator for economic growth

What are the 3 ways to measure GDP?

1. Output method

2. Income method

3. Expenditure method

What is the output method for measuring GDP?

Calculating the sum of the total value of all the goods and services produced in the economy in a single year

What are the 5 factor incomes?

1. Wages

2. Salaries

3. Interest

4. Rent

5. Profits

What is the income method for measuing GDP?

1. By calculating the final sum of all the factor incomes earnt in the economy in a single year

2. This is the sum of all the wages, salaries, interest, rent, and profits earnt in the economy in a single year.

What is the expenditure method for measuring GDP?

1. By calculating the total expenditure of all the goods and services in the economy in a single year

2. This is found by the equation for aggregate demand: consumption + investment + government spending + (exports - imports).

By using an example prove how expenditure = income = output

1. When a consumer visits a local shop to purchase a product, the amount of money they spend on the product would be the same as the final value of the output of the product.

2. In addition to this, the money the consumer spends would transfer to the shopkeeper's income

3. Therefore, the amount the consumer's spends on the product would be equal to the final value of the output of the product, which then contributes to the income earnt by the shopkeeper