A model that assumes there are just 2 sets of economic agents: households & firms. It is a model of a closed economy.
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What are the 2 flows?
1) A physical flow of 'real things'. 2) A monetary flow, i.e. the money that pays for the 'physical things'.
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What do the households provide & what do they receive as a result?
Labour, land & capital. Firms pay money to households for the FoP in the form of national income.
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As a result, what do firms produce?
Goods & services which make up the national output.
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What do households do as a result of a firm's production?
Spend the money they get from national income on the goods & services that firms create - the value of this spending is called the national expenditure.
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What is an open economy?
An economy open to international trade.
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What realistically affects the monetary flow?
Injections & withdrawals/leakages of money.
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What do injections into the circular flow of income come in the form of?
Exports, investment & government expenditure. These go directly to firms.
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What do withdrawals from the circular flow of income come in the form of?
Imports, savings & taxes. These can be made by households or firms.
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When is the economy in equilibrium?
When injections & withdrawals are equal.
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What happens if injections are greater than withdrawals?
Firms will increase output. As a result national output, income & expenditure will all increase.
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What happens if withdrawals are greater than injections?
Firms will reduce output. As a result national output, income & expenditure will all decrease.
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Other cards in this set
Card 2
Front
What are the 2 flows?
Back
1) A physical flow of 'real things'. 2) A monetary flow, i.e. the money that pays for the 'physical things'.
Card 3
Front
What do the households provide & what do they receive as a result?
Back
Card 4
Front
As a result, what do firms produce?
Back
Card 5
Front
What do households do as a result of a firm's production?
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