Economics Mcqs. It revolves around flows of goods and services and factors of production between firms and households. From a simple version of the circular flow, we learn that—as a matter of accounting— gross domestic product (GDP) = income = production = spending. (a)  Explain determination of macroeconomic phenomena, including equilibrium national income, growth in national income, By: Anuj Aggarwal Circular flow of income or circular flow Refers to a simple economic model which describes the reciprocal circulation of income between producers and consumers. In reality the circular flow of income is affected or influenced by many factors that bring about changes in its flow. Government does not exist at all, therefore, there is no public expenditure, no taxes, no subsidies, no social security contribution, etc. WITHDRAWAL OF MONEY FROM THE CIRCULAR FLOW. The circular flow of income is a theory that describes the movement of expenditure and income throughout the economy. Households. Next: What are the differences between whole life policy and endowment policy? A1a. Households supply factor inputs to firms via the factor market. Coronavirus: Impact on the Circular Flow. Distinguish between a whole life policy and endowment policy. Principles of Circular Flow of National Income! National income is a flow concept because it is measured over a period of time (length of time). The Circular Flow of Income Gavin Cameron Lady Margaret Hall Hilary Term 2004. introduction • “What is annually saved is as regularly consumed as what is annually spent, and nearly in the same time too; but it is consumed by a different set of people. This is well worth a look especially if you are teaching and studying the causes of and policy responses to external demand and supply-side shocks. The circular flow of income not only takes place in two sectors closed economy, but it also takes place in three sector economy as well as the four-sector open economy in which foreign trade transactions are also considered. Mcq Added by: Adden wafa. Economics Mcqs for test Preparation from Basic to Advance. This circular flow of money will continue indefinitely week by week and year by year. here you will find the the Baisc to Advance and most Important Economics Mcqs for your test preparation. Circular Flow of Income in a Two-Sector Economy: According to circular flow of income in a two-sector economy, there are only two sectors of the economy, i.e., household sector and business sector. Between the two … price inflation, unemployment, and trade deficits and surpluses, Firms make goods and people SPEND on those goods, This is the CIRCULAR FLOW of income / expenditure, Exports (More money coming from abroad) (X), Government Spending (helps firms and people spend more) (G), Download all CIMA course notes, track your progress, option to buy premium content and subscribe to eNewsletters and recaps. (T) Any increase in any of these factors will lead to an decrease in production, less employment, smaller incomes and decreased consumer spending. The circular flow of income is a theory that describes the movement of expenditure and income throughout the economy. What are the factors affecting the circular flow of income? The circular flow of Income and Expenditures Imagine an economy that produces a single good, bread, from a single input, labor. This is how the economy functions. Firms use labor from households and other factors of production to create goods which are sold to households, which in turn own the factors of production which are sold to firms in the factors market. List the functions of advertising agencies. Luckily, the goods and services markets don’t tell the whole story, and factor markets serve to complete the circular flow of money and resources. It may, however, be pointed out that this flow of money income will not always remain the same in volume. The circular flow shows how national income or Gross Domestic Product is calculated Businesses produce goods and services and in the process of doing so, incomes are generated for factors of production (land, labour, capital and enterprise) – for example wages and salaries going to … The circular flow of income shows connections between different sectors of our economic system. Watch Queue Queue Individuals who consume goods and receive wages from firms. Give the features of a perfect competition market. between economic agents. This will cause a reduction in the amount of withdrawals from the circular flow of income. (M) Savings. In what ways does the government create an enabling environment for business operations? Models of Circular Flow in Economics. © 2008-2020 by KenyaPlex.com. This circular flow of income also shows the three different ways that National Income is … In an economy households provide factors of production, such as labour, to firms. The simple answer is the degree of autarky in a given economy. In the upper loop of this figure, the resources such as land, capital and entrepreneurial ability flow from households to business firms as indicated by the arrow mark. There are two sides to every transaction. The coin can be thought of as GDP, and the two flows are the Expenditure Approach and the Income Approach in measuring GDP. Both of these factors should help to increase the money in the circular flow, as the value of injections is likely to be greater than the value of withdrawals. Highlight ways in which the government creates an enabling environment for business operations. In factor markets, they are the sole buyers of factors of production provided by the household sector.They hand over money to the household sector as compensation for the use of production factors. These are: (i) Withdrawals and Savings: These are income but not spent, and this in turn, reduces the amount of income of either the households or the firms e.g. The term “factors of production” refers to anything that is used by a firm in order to make a final product. The most common form of this model shows the circular flow of income between the household sector and the business sector. payment for factors of production (b). In a closed economy, goods and services are exchanged in product markets and factors of production are exchanged in factor markets. maurice.mutuku answered the question on June 30, 2017 at 13:58. These income payments to households on hiring input services must be identical to the firms’ income. 2.1. wages, rent or dividends). Governments tax households and businesses in the form of income tax, sales tax, property tax, and other types of taxes. Economics Mcqs for … The circular flow of income is significant in four areas: Measurement of national income; Knowledge of Interdependence - Circular flow of income signifies the interdependence of each of activity upon one another. National income, output, and expenditure are generated by the activities of the two most vital parts of an economy, its households and firms, as they engage in mutually beneficial exchange. A. Production generates income and income leads to expenditure on production. For example, saving is a leakage out of the expenditure stream. 1. Primary and High School Exams in Kenya With Marking Schemes. firms provide the following in the circular flow of income(a). But what the circular flow diagram ignores the beginning and end of the economic process. Wages and salaries. The circular flow of income is a way of representing the flows of money between the two main groups in society - producers (firms) and consumers (households). This relationship lies at the heart of macroeconomic analysis. What are the functions of advertising agencies? With the advancement of Information Technology (I.T), there has been a lot of revolution in communication, give the current trends in communication. The circular flow of income or circular flow is a model of the economy in which the major exchanges are represented as flows of money, goods and services, etc. What are the factors determining the amount of revenue to be collected through taxation? 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