Circular Flow Of Income

Front 1

Def of circular flow of income

Back 1

This explains how money circulated in an economy between firms, households and government

Front 2

Name the types of economies

Back 2

1) closed economy

2) open economy

Front 3

Def of closed free economy + formula

Back 3

This involves firms and households. This is the icone that individual can use or invest

Y= C+ S/I

Front 4

Def of closed mixed economy

Back 4

This included households, firms and government

Y= C+I + G

Front 5

Assumptions in the circular flow of income in a closed free economy

Back 5

We assume that all the income received is spent. However, in reality, this might not be the case

Front 6

Assumptions in a closed mixed economy

Back 6

In this case, not all income received will be spent. Some households will spend on Consumption, some will save and some will be taxed by the government

While, firms income received by firms such as profit will be taxed. However, firms will also create new investment. Therefore, from the circular flow of income, it will cause leakages (withdrawals) and injections (J)

Front 7

Def of leakages

Back 7

These are the money that flow out of the circular flow of income.

Therefore, they reduce the size of the circular flow of income, such as taxes, savings

Front 8

Def of injections

Back 8

These are the money that flow into the circular flow of income.

Therefore, they increase the size of the circular flow of income. Such as Investment, Gov spending

Front 9

Def of injections

Back 9

These are the money that flow into the circular flow of income.

Therefore, they increase the size of the circular flow of income. Such as Investment, Gov spending

Front 10

Def of open economy + formula

Back 10

This consists of households, firms, government and foreign trade

Y= C+I+G+ (X-M)

Front 11

Def of injections

Back 11

These are the money that flow into the circular flow of income.

Therefore, they increase the size of the circular flow of income. Such as Investment, Gov spending

Front 12

Def of open economy + formula

Back 12

This consists of households, firms, government and foreign trade

Y= C+I+G+ (X-M)

Front 13

Describe what will happen in leakages and injections in an open economy and their relationship

Back 13

Leakages will then consist of Taxes+ Savings+ Imports

Injections : Government spending, Investments + Exports

For every leakages, there must be a corresponding injections

(T=G) (S=I) ( M=X)

Front 14

Def of injections

Back 14

These are the money that flow into the circular flow of income.

Therefore, they increase the size of the circular flow of income. Such as Investment, Gov spending

Front 15

Def of open economy + formula

Back 15

This consists of households, firms, government and foreign trade

Y= C+I+G+ (X-M)

Front 16

Describe what will happen in leakages and injections in an open economy and their relationship

Back 16

Leakages will then consist of Taxes+ Savings+ Imports

Injections : Government spending, Investments + Exports

For every leakages, there must be a corresponding injections

(T=G) (S=I) ( M=X)

Front 17

Def of equilibrio national income

Back 17

T+S+M= G+I+X

Front 18

Def of injections

Back 18

These are the money that flow into the circular flow of income.

Therefore, they increase the size of the circular flow of income. Such as Investment, Gov spending

Front 19

Def of open economy + formula

Back 19

This consists of households, firms, government and foreign trade

Y= C+I+G+ (X-M)

Front 20

Describe what will happen in leakages and injections in an open economy and their relationship

Back 20

Leakages will then consist of Taxes+ Savings+ Imports

Injections : Government spending, Investments + Exports

For every leakages, there must be a corresponding injections

(T=G) (S=I) ( M=X)

Front 21

Def of equilibrio national income

Back 21

T+S+M= G+I+X

Front 22

Def of average propensity to consumption

Back 22

This is the proportion of the total income spent on consumption

APC= C\Y

Front 23

Describe the relationship of APC in rich and poor countries and draw conclusions

Back 23

The higher the income, the lower the APC (viceversa)

In terms of APC, Lower incomes have a higher APC

Front 24

Describe the relationship of APC in rich and poor countries and draw conclusions

Back 24

The higher the income, the lower the APC (viceversa)

In terms of APC, Lower incomes have a higher APC

Front 25

Def of Average Propensity ti savings +

Formula

Back 25

This is the propensity of the total income saved

APS= S\Y

Front 26

Relationship between APS

Back 26

The higher the income, the higher the APS (viceversa)

In terms of APS, the higher the income, the higher the APs

Front 27

Relationship between APS

Back 27

The higher the income, the higher the APS (viceversa)

In terms of APS, the higher the income, the higher the APs

Front 28

Def of Marginal propensity to consume + formula

Back 28

This is the proportion of additional income spent on consumption

MPC= change in consumption/ change in income

Front 29

Relationships of MPC in rich and poor income

Groups

Back 29

MPCis lower in higher income groups, while MPC is higher in lower income groups.

At low-income levels, an increase in income is likely to see a high marginal propensity to consume; this is because people on low incomes have many goods/services they need to buy. However, at higher income levels, people tend to have a greater preference to save because they have most goods they need already.

Front 30

Def of marginal propensity of savings

Back 30

This is the proportion of additional income saved

Front 31

Why is MPS + MPC always equal to one?

Back 31

If we ignore taxes and imports, i.e. assume a closed economy. Eith we send money or save it. If we gain an extra £10, and spend £8, by definition the extra £2 is saved.

MPS = 1-MPC

The marginal propensity to save is related to the marginal propensity to consume. Ignoring taxes and imports, the marginal propensity to save (mps) = 1-mpc

Front 32

Importance of marginal propensity to save

Back 32

multiplier-formula

Influences the size of multiplier. A high marginal propensity to save will lead to a smaller multiplier effect. With a high mps, extra income does not ‘trickle down’ to other elements of the economy but gets saved. It reduces the effectiveness of fiscal policy

Marginal propensity to withdraw MPW is the extra income that is withdrawn from the circular flow. Withdrawals = saving, import and tax.