Lecture 12 - Circular flow of income

What does the circular flow of income model illustrate?

It illustrates how money, goods, and services move through an economy and the interdependence of economic agents.

What are the five main sectors of an economy?

Households, Firms, Government, Financial Market, Foreign Sector.

What do households provide to firms in the circular flow model?

Households provide factors of production to firms.

What do firms pay households for in the circular flow of income?

Firms pay households for factors of production, such as wages, rent, interest, and profit.

What is GDP in the context of the two-sector model?

GDP equals total income and total expenditure, represented as GDP = C, where C is consumption expenditure.

In the three-sector model, what are the injections and leakages?

Injections include government spending (G), while leakages include taxes (T) paid to the government.

What is the equilibrium condition in the four-sector model?

The equilibrium condition is S = I, where S is savings and I is investment.

What do exports represent in the five-sector model of the circular flow of income?

Exports (X) represent goods and services purchased by foreigners from the domestic economy.

How do injections and leakages affect the circular flow of income?

Injections increase the flow of income, while leakages withdraw from it; in equilibrium, total injections must equal total leakages.

Why is understanding the circular flow of income important for economists?

It helps measure national income (GDP), analyze economic relationships, identify causes of fluctuations, and formulate macroeconomic policies.