8. (a) The diagram below represents the Circular Flow of Income in a closed economy without Government - Leaving Cert Economics - Question 8 - 2008
Question 8
8. (a) The diagram below represents the Circular Flow of Income in a closed economy without Government.
(i) Explain the meaning of the term ‘closed economy’.
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Worked Solution & Example Answer:8. (a) The diagram below represents the Circular Flow of Income in a closed economy without Government - Leaving Cert Economics - Question 8 - 2008
Step 1
Explain the meaning of the term ‘closed economy’.
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Answer
A closed economy is an economic system that does not engage in international trade. It relies solely on its domestic resources, producing and consuming goods and services internally. This type of economy is self-sufficient and does not import or export products to other countries.
Step 2
Copy the diagram into your answer book. Clearly label each of the lines (1) to (3).
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Answer
This step requires the student to draw the provided diagram and label the lines as follows:
Payment for factors of production.
Supply/commodities or goods & services.
Spending/payment.
Step 3
Referring to the diagram above, explain briefly the types of transactions/activities which take place between households and firms.
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Answer
Households supply factors of production, such as labor, to firms and in return receive income. The firms produce goods and services, which are then supplied to households. Households use their income to purchase these goods and services, thus sustaining the flow of income in the economy.
Step 4
State what each of the letters / symbols in the formula above stands for.
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Answer
C stands for Consumption, I for Investment, G for Government spending, X for Exports, and M for Imports.
Step 5
Calculate, using the figures provided, the level of National Income. Show your workings.
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Answer
Using the national income formula:
Y = C + I + G + X - M
Y = €1,200m + €500m + €300m + €40m - €80m
Y = €1,960m
Thus, the level of National Income is €1,960 million.
Step 6
What do the initials GNP stand for?
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GNP stands for Gross National Product, which measures the total economic output produced by the residents of a country, regardless of where the production takes place.
Step 7
Calculate the GNP per person for both years. Show all your workings.
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Answer
For 1998:
GNP per person = GNP / Population = €2,500 million / 5 million = €500
For 2008:
GNP per person = GNP / Population = €2,700 million / 6 million = €450
Step 8
State and explain two possible economic disadvantages to a country of a decrease in GNP per person.
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Lower standard of living: A lower GNP per person may indicate a reduced ability for individuals to afford goods and services, resulting in a lower standard of living.
Loss of jobs: With decreased spending power, aggregate demand may fall, leading firms to cut back on production and ultimately, jobs, thereby increasing unemployment.
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