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The diagram below represents the Circular Flow of Income in an open economy without Government - Leaving Cert Economics - Question 5 - 2013
Question 5
The diagram below represents the Circular Flow of Income in an open economy without Government. (a) (i) State what each of the lines numbered 1 to 5 represents. (ii... show full transcript
Worked Solution & Example Answer:The diagram below represents the Circular Flow of Income in an open economy without Government - Leaving Cert Economics - Question 5 - 2013
Step 1
State what each of the lines numbered 1 to 5 represents.
Answer
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Payment / for factors of production - This line represents the payment made by firms to households for the factors of production provided, such as labor or land.
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Spending on (domestic) goods & services - This line illustrates the expenditure by households on goods and services produced within the economy.
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Savings - This line signifies the portion of income that households choose to save rather than spend immediately.
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Imports - This refers to the spending by households on goods and services produced abroad, signifying the inflow of foreign goods into the domestic economy.
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Exports - This represents the income firms receive from selling their goods and services to foreign markets, depicting the outflow of domestic goods.
Step 2
Step 3
Step 4
Step 5
Outline two economic reasons for this development.
Answer
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Increased unemployment - High unemployment rates lead to a reduction in disposable income as more people lose their jobs, directly affecting consumer spending.
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Increased taxation - Higher taxes reduce the amount of disposable income available to consumers, leading to decreased consumer spending.
Step 6
Discuss two actions which the government could take to increase consumer expenditure.
Answer
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Decrease VAT rates - By lowering VAT rates, the government can lessen the cost of goods and services, encouraging consumers to spend more.
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Provide incentives to consumers to spend - The government could offer subsidies or direct payments to households, incentivizing additional spending in the economy.