Circular Flow of Income Flashcards

Study Notes

Circular Flow of Income

A model showing the movement of money between households and firms in an economy.
Comprises two main sectors: households and firms, indicating a simplified economy.

Households and Firms Interaction

Households receive income by providing services to firms and spend this income on goods and services.
Firms employ resources (land, labor, capital) from households to produce goods and services.

Key Terms in Circular Flow

Leakages: Components that withdraw money from the flow, including:
- Saving: Funds set aside for future use.
- Imports: Spending on foreign goods and services.
- Taxation: Payments made to the government, such as income tax.
Injections: Additions to the flow, enhancing economic activity, including:
- Investment: Capital spending by firms on technology and production.
- Government Spending: Expenditure by government on public services and projects.
- Exports: Sales of domestic goods and services to foreign consumers.

Economic Equilibrium

Achieved when the rate of injections equals the rate of leakages, stabilizing the economy.

Aggregate Supply and Demand

Aggregate Supply: Total goods and services available in the market from producers.
Aggregate Demand: Total demand for final goods and services at various price levels, representing the economy's gross domestic product (GDP).

Macroeconomics vs. Microeconomics

Macroeconomics: Studies the total behavior of consumers, firms, the government, and international agents.
Microeconomics: Focuses on individual behavior within specific markets.

Definitions of Entities

Household: An individual or group at the same address, hiring out their services in a market economy.
Firm: An organization that employs resources to produce products.

Economic Agents

Term referring collectively to households and firms involved in economic activity.

Roles of Government

Collects taxes to fund public services and manages economic behavior through regulation.

Resources

Materials found in the earth that hold value and are essential for production and consumption activities.

Goods and Services

Goods: Tangible products satisfying human needs or wants.
Services: Intangible activities providing value without transferable ownership.

Consumption

Expenditure by households on goods and services, excluding new housing purchases.

Importance of Government Sector

Central to macroeconomic discussions, focusing on fiscal policy, taxation, and public spending for societal welfare.

Description

Explore the concept of the circular flow of income through these flashcards. Understand the basic model, its assumptions, and the role it plays in economic interactions between households and firms. Ideal for students learning about economics.

Circular Flow of Income Flashcards

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Questions and Answers

What does the circular flow of income model consist of?

What do households spend their income on?

Which of the following is considered a leakage from the circular flow?

What are injections in the circular flow?

An economy is in equilibrium when the rate of injections equals the rate of withdrawals.

What does aggregate supply represent?

Define macroeconomics.

A household is an individual or group of people who live at the same ______.

Match the following terms with their definitions:

What are examples of leakages in the circular flow?

Consumption excludes purchases of new housing.