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CIRCULAR FLOW OF INCOME

CIRCULAR FLOW OF INCOME. A visualization of all interactions in a market economy. Injections (GXI) 1. Gov. Spending 2. Exports 3. Investments. Firms. Factor Market. Product Market. Payment for Goods & Services. Goods & Services. Land Labor Capital Entrepreneurship. Rent Wages

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CIRCULAR FLOW OF INCOME

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  1. CIRCULAR FLOW OF INCOME A visualization of all interactions in a market economy

  2. Injections (GXI) 1. Gov. Spending 2. Exports 3. Investments Firms Factor Market Product Market Payment for Goods & Services Goods & Services Land Labor Capital Entrepreneurship Rent Wages Interest Profit Leakages(TMS) 1. Taxation 2. Imports 3. Savings Households

  3. HOUSEHOLDS • All workers and consumers • Own factors of production

  4. FIRMS • Producers of goods and services • Made up of businesses of various types and sizes, from small family-run proprietorships to large corporations

  5. LAND • All the natural resources found on or under the ground that are used to produce goods & services

  6. LABOR • All the human time, effort, and talent used to produce goods and services

  7. CAPITAL • All the resources made and used by people to produce and distribute goods & services

  8. ENTREPRENEURSHIP • Combination of vision, skill, ingenuity, and willingness to take risks that is needed to create and run a new business

  9. FACTOR MARKET • The market for the factors of production – land, labor, capital, and entrepreneurship

  10. RENT • The payment made and the income received for the use of land (i.e. the payment for the use of a natural resource and not simply the payment for the use of an apartment building or other building

  11. WAGES • The payment made and the income received for the use of labor (includes commissions, tips, and employee benefits)

  12. INTEREST • The payment made and the income received for the use of capital

  13. PROFIT • The income received from the activity of enterprise (the income which is left over after all the factors of production have been paid). Profits can be thought of as a reward for enterprise.

  14. GOODS • Physical objects, such as food, clothing, and furniture, that can be purchased.

  15. SERVICES • Work that one person does for another for payment

  16. PAYMENT FOR GOODS & SERVICES • The expenditure by households on goods and services

  17. PRODUCT MARKET • The market for consumer goods and services

  18. INJECTIONS • Items which add to the circular flow of income

  19. GOVERNMENT SPENDING • Government purchases goods and services from firms • Government also disburse transfer payments such as welfare and subsidies

  20. EXPORTS • Goods and services produced in 1 country and sold to another country.

  21. INVESTMENTS • Spending that results in a physical increase in plant, equipment, or machinery.

  22. LEAKAGES • Income received from circular flow which does not flow directly back

  23. TAXATION • Government taxes both firms and households

  24. IMPORTS • Goods and services that households and firms purchase that are from outside the domestic economy.

  25. SAVINGS • Income received but not spent on consumption

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