JO

Untitled Flashcards Set

Here are detailed notes based on the content of your diagram:

The Circular Flow of Income

Key Concepts:

  • Model: A simplified representation used for explanation and prediction of economic behavior.

  • GDP: Gross Domestic Product, representing the total value of goods and services produced in an economy.

Components of the Circular Flow:

  1. Firms:

    • Provide goods and services (G+S) to households.

    • Pay wages to households in exchange for factors of production.

  2. Households (Consumers):

    • Spend income on goods and services (Expenditure).

    • Provide labor and other factors to firms in exchange for wages.

Injections (Additions to the Economy):

  • Investment (I): Borrowing from financial markets to fund economic activity.

  • Exports (X): Revenue from selling goods/services to other countries.

  • Government Spending (G): Expenditures by the government to stimulate economic activity.

Withdrawals/Leakages (Money Leaving the Economy):

  • Savings (S): Money saved by households instead of being spent.

  • Imports (M): Money spent on foreign goods/services.

  • Taxes (T): Money taken by the government, reducing disposable income.

GDP and Economic Changes:

  • Injections > Withdrawals: GDP increases.

    • Example: The "Furlough Scheme" during COVID-19 supported GDP by increasing government spending (G).

  • Withdrawals > Injections: GDP decreases.

    • Example: A fall in Investment (I) and Exports (X) after the UK left the EU.

Income = Output = Expenditure:

  • Output: The monetary value of goods and services produced.

  • Income: Total earnings paid to consumers for their contributions to production.

  • Expenditure: Total spending on goods and services.

Economic Scenarios:

Increase in Oil Prices:

  • Impacts:

    • Higher costs and prices for goods and services.

    • Reduced household spending on goods and services.

    • Lower total expenditure and demand for production factors.

    • Reduced wages and total income.

    • Net effect: Falling GDP due to reduced economic activity.

Reduction in Income Tax:

  • Impacts:

    • Higher disposable income for households.

    • Reduced leakages (e.g., lower taxes).

    • Increased expenditure on goods and services.

    • Firms boost production to meet demand.

    • Net effect: Rising GDP due to increased output.

This summary captures the key details of the circular flow model and examples shown in your diagram. Let me know if you need further clarification!