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The circular flow of income basic model (1) - closed economy no government

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Syllabus says

You need to be able to:

using a diagram (eg Diagram above), the circular flow of income between households and firms in a closed economy with no government.

Identify the four factors of production and their respective payments

Factor             Payment

Land                 Rent

Labour              Wages

Capital              Interest

Entrepreneur       Profit  

and explain that these constitute the income flow in the Closed Economy with no Government model.

Concepts arising from the Circular Flow model

Outline that the income flow is numerically equivalent to the expenditure flow and the value of output flow.

Y = E = Q

Remember that the flow of goods and services one way and the flow of factors of production the other way is called

Real Economy

and the flow of (money) income one way and the flow of (money) expenditure the other way is called the

Nominal Economy