| Briefly Explain the Simple Income Flows between Firms and Households | -Economies are Made Up of Firms and Households-Firms Produce Goods that makes the National Output -Households will provide the Land, Labour an Capital that Firms will use to make the National Output. Firms give 'Compensation' in the National Income-Households, with their National Income, will Spend on the Goods that the Firms make, the National Expenditure |
| What are the 2 Types of Flow in the Circular Income Diagram? | -Physical Flow [Straight Arrows] of the 'Real Things' so the Labour, Land and Capital from Households, and Goods and Services from the Firms
-Monetary Flow [Curved Flow] - The Money that Pays for the Physical Things |
| What are
1. Injections to the Circular Flow of Income [Monetary Flow]
2. Withdrawals to the Circular Flow of Income [Monetary Flow] | 1. Injections comes from Exports, Investment and Government Spending. They go Directly to Firms
2. Withdrawals comes from Imports, Savings and Taxes - can come from Households or Firms |
| What does the Economy being in
-Equilibrium
-Injections Greater
-Withdrawals Greater | -Economy in Equilibrium means Injections = Withdrawals
-More Injections can lead to greater Expenditure compared to Output, so Firms will Increase Output leading to an Increase in National Output, Income & Expenditure [And thus Economic Growth]
-More Withdrawals can lead to Output being Greater than Expenditure [Domestic Demand plummets] leading to less Output. National Output, Income & Expenditure will Fall |
| What is the Multiplier Effect | -When an Injection has happened, the Actual Change in National Income becomes Greater than the Injection |
| Using the Multiplier Effect, what can happen when the Governments gives £50 mil to a Firm | -Government gives £50 Mil for Investment purposes. Money used to pay Households for their FoP [Land, Labour..]
-£12 Mil will leak out via Withdrawals [Savings, Tax] but the £38 Mil spent on Goods and Services - £38 Mil as Expenditure
-Another £10 Mil will leak out as Withdrawals from Firms [Savings, Tax, Imports…] but £28 Mil used to pay Households…
-Keeps going on and on, until there is Nothing Left of the Initial Injection. Since the Injection has gone around multiple times, the total effect on Income, Output and Expenditure is More than £50 Mil |
| What can Influence the Multiplier Effect? | -The Size of such depends on how much money Leaks from the Circular Flow - Bigger Withdrawals means Quicker the Injection will leave the Circular Flow
-This can be why Imports is Important - because it affects the Multiplier Effect quite Significantly |
| What is Wealth? | -Wealth is just the Total Value of the Assets that an Individuals Owns, or by Firms.
-Assets can be Actual Money, like Savings, and Physical Items, like Houses |
| What is different about Wealth and Income? Why may they be Similar? | -Income is a FLOW of Money while Wealth is a STOCK of Money
-The Wealth isn’t being used in the Circular Flow, but can be at some Point [Depends on Liquidity]
-But both can have a Correlation. High Income people will have High Wealth eg as they can Purchase more Expensive Items, and more Money to Save |
