3 Questions
Match the following terms related to the Circular Flow of Income:
Households = Provide factors of production Firms = Produce goods and services Government = Collects taxes and provides public services Financial market = Channels savings into investment
Match the following flows in the Circular Flow of Income:
Income flow = Wages, rent, interest, and profits Output flow = Goods and services Expenditure flow = Consumption, investment, government spending, and net exports Factor flow = Land, labor, capital, and entrepreneurship
Match the following diagrams with their corresponding concept in the Circular Flow of Income:
Two-sector model = Involves households and firms only Three-sector model = Involves households, firms, and government Four-sector model = Involves households, firms, government, and foreign sector Five-sector model = Involves households, firms, government, foreign sector, and financial market
Study Notes
Circular Flow of Income
- The Circular Flow of Income model is a macroeconomic concept that illustrates the flow of income and expenditure between different sectors of the economy
- The model consists of two main sectors: the Household sector and the Business sector
- The Household sector provides factor services (labor, capital, and entrepreneurship) to the Business sector in exchange for income
- The Business sector produces goods and services, which are then sold to the Household sector
Flows in the Circular Flow of Income
- Injections: additions to the circular flow, including investment, government spending, and exports
- Withdrawals: leakages from the circular flow, including savings, taxes, and imports
- Leakages: savings, taxes, and imports that reduce the flow of income
- Injections: investments, government spending, and exports that increase the flow of income
Diagrams in the Circular Flow of Income
- Simple Circular Flow Diagram: illustrates the flow of income and expenditure between the Household and Business sectors
- Extended Circular Flow Diagram: includes the government sector, the foreign sector, and the financial sector, and shows the flows of income and expenditure between these sectors and the Household and Business sectors
Test your understanding of the Circular Flow of Income with this quiz! Match terms, flows, and diagrams related to the concept and see how well you grasp the concept. Challenge yourself and enhance your knowledge of this fundamental economic concept.
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