CFOI, Business cycle, indicators, Monetary, Fiscal

Front

The Circular Flow of Income

Back

a simplified model of the economy enabling economists to identify solutions to problems in the business cycle (level of economic activity)

Front

What does The Circular Flow of Income show?

Back

• It shows the connections between the 5 different sectors of an economy: household, firms, financial, gov, overseas

• It shows where money is being injected and leaked from the economy

Front

What is the economic problem?

Back

Our human wants significantly outweigh the resources available. Human wants are unlimited, while natural resources are limited and finite.

Front

Scarcity

Market

Back

the excess of human wants over what can actually be provided and produced

where limited resources are allocated and exchanged between buyers and sellers

Front

What are the factors of production?

Back

Economic resources needed for the creation of goods and services

Front

List the factors of production with detail, and their income return

Back

1. Land - any type of land (agricultural, commercial real estate etc) and all natural resources (minerals, water, forests etc) Factor income return: rent

 

1. Labour - the effort, time and skills expended by individuals to produce goods and services

           Factor income return: wages

 

1. Capital - produced assets created or acquired used to make goods and services (tools, machinery, technology etc. Factor income return: interest

 

1. Enterprise - the ability of people to take financial risks and organise the other factors of production into a unit capable of producing goods and services. Factor income return: profit

Front

Explain the 2 sector model by defining both and explaining the process

Back

1. Household sector - comprised of consumers who own economic resources

2. Firm sector - banks, businesses and organisations

 

• Households sell their economic resources to firms

• Firms pay income for these resources

• Firms use these resources to produce goods and services for household

• Household use their income to buy/consume goods and services provided by firms

Front

Explain the 3 minor sectors and their relationship with households and firms

Back

1. Financial sector - banks and financial institutions

 

• Households give income to financial institutions to be saved

• Financial institutions lend this money to firms which make investments

 

1. Government sector - all governments

 

• Income taxed is held by governments, who use this money to pay for collective goods through government expenditure such as roads, healthcare, education and defence

 

1. Overseas sector - transactions between a nation and rest of the world

 

• Goods and services bought overseas imports, taking money out of the economy to overseas

• Goods and services sold overseas are exports, where money flows into the economy from overseas

Front

Back

Front

Leakages and injections

Leakages (S+T+M) < Injections (I+G+X) =

 

Leakages (S+T+M) > Injections (I+G+X) =

 

Leakages (S+T+M) = Injections (I+G+X) =

Back

Leakages: what goes out of the economy

Injections: what goes into the economy

Leakages (S+T+M) < Injections (I+G+X) = expansion/boom/up swing in economy

 

Leakages (S+T+M) > Injections (I+G+X) = contraction/bust/down swing in economy

 

Leakages (S+T+M) = Injections (I+G+X) = no change/equilibrium