Ch16 Circular Flow of Income in an Economy

Front

What is a closed economy?

Back

A closed economy does not trade with other economies.

Front

What is an open economy?

Back

An open economy trades with other economies.

Front

What is the circular flow of income in an open economy?

Back

It includes government spending, consumer’s expenditure, indirect taxes, and investment.

Front

What is an injection in the circular flow of income?

Back

An injection is an addition to the circular flow of income.

Front

What are examples of injections?

Back

Exports, investment, and government spending.

Front

What is a leakage in the circular flow of income?

Back

A leakage is a withdrawal from the circular flow of income.

Front

What are examples of leakages?

Back

Imports, saving, and indirect taxes.

Front

What is equilibrium income in a two-sector economy?

Back

It is where injections into the circular flow of income are equal to withdrawals, and the value of output is equal to the value of income.

Front

What is equilibrium income in a four-sector economy?

Back

It is where injections into the circular flow of income are equal to withdrawals, and the value of output is equal to the value of income, including households, firms, government, and a foreign trade sector.

Front

How do international tourists affect the circular flow of income?

Back

Consumption expenditure by international tourists and investment by private sector businesses on hotels and facilities for international tourists increase income and output, leading to an increase in GDP.