Economics Notes

SL/HL core topics (SL paper 1 and HL paper 1) Part (a) questions

8.1 (a) Using a diagram to show the income flow of the circular flow model, identify the four factors of production and their respective payments. [10 marks]

• Circular flow model is a model that shows the relative flows of income in the entire economy of a country
• Draw model
• Main economy is between household and firms
• Producers provide income for households in this flow whilst households provide consumption
• Producers use factors of production to produce for households (Labor, land, capital and entrepreneurship)
• Firms pay wages for labor
• Firms pay rent for land
• Firms pay interest for capital
• Firms pay profits for entrepreneurship
• This is the flow of the economy
• 1. Households provide factors of production 2. Receive income 3. Use income to consume goods produced by the firms. This is the circular flow of income

8.2 (a) Using a circular flow diagram, explain how the size of the flows will change depending on the relative size of leakages and injections. [10 marks]

- Circular flow model is a model that shows the relative flows of income in the entire economy of a country

- Main economy is Household and Firms

- Household provide factors of production (Land, labor, capital and entrepreneurship) to receive income (Rent, wages, interest and profit). Using this income received, households consume the goods and services produced by firms

- Although this is the main economy, there are peripheral sectors to the main economy. This means there is leakage as well as injection.

- The relative size of leakages and injections have an impact on the entire economy and the economy’s equilibrium at which it operates

- The economy is in equilibrium where the value of leakages is equal to the value of injections

- If leakages rise without a corresponding rise in injections, then national output will fall to a new, lower equilibrium as there will be less income circulating

- If injections rise without a corresponding increase in leakages, then national output will increase and reach a new, increased equilibrium as there is more income circulating in the main economy.

- Value of leakages and injections affect the size of the flows as well as the equilibrium and output of the economy

8.3 (a) Explain the possible importance of using ‘green GDP’ as a measure of economic activity. [10 marks]

- Green GDP is the measure of GDP that takes into environmental costs incurred by the production of goods and services included in the GDP figures

- Green GDP = GDP – Environmental Costs of Production

- Green GDP is a good measure of economic activity in a country because it takes into account costs that are otherwise ignored so the measure is more realistic and a better representation of how the economy is doing

- Normal GDP may be higher than it actually is because Green costs may be super significant especially in secondary sector