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7. (a) (i) Explain, with the aid of a diagram, the Circular Flow of Income for an open economy - Leaving Cert Economics - Question 7 - 2015
Question 7
7. (a) (i) Explain, with the aid of a diagram, the Circular Flow of Income for an open economy. Outline how each of the following should affect the level of Nationa... show full transcript
Worked Solution & Example Answer:7. (a) (i) Explain, with the aid of a diagram, the Circular Flow of Income for an open economy - Leaving Cert Economics - Question 7 - 2015
Step 1
Explain, with the aid of a diagram, the Circular Flow of Income for an open economy.
Answer
The Circular Flow of Income illustrates how money moves through an economy. In an open economy, households provide factors of production (labor, capital) to firms in exchange for incomes (wages, rents, profits). Firms produce goods and services that households consume, completing the cycle.
The diagram consists of:
- Households: earn incomes and spend on goods/services.
- Firms: produce output using factors provided by households.
- Government: collects taxes and provides public services.
- Financial Institutions: help savings and investments.
- Foreign Markets: involve imports/exports influencing income.
- An increase in Irish exports acts as an injection into the circular flow, increasing aggregate demand and leading to a multiplier effect, which raises National Income.
- An increase in the level of savings is a withdrawal from the flow. With less consumption, aggregate demand decreases, resulting in a reduced multiplier effect on National Income.
Step 2
Discuss four factors which should be considered when comparing national income statistics from different countries.
Answer
When comparing national income statistics, consider the following factors:
- Population Size: Adjust figures on a per capita basis to account for different population sizes affecting individual income standards.
- Price Level Differences: Compare GDP adjusted for changes in price levels to maintain consistency and reflect true living standards across countries.
- Common Currency: Use a consistent metric (e.g., dollars) to ensure comparability, especially when the countries use different currencies.
- National Income Accounting Differences: Be aware of the various methods countries use to calculate national income, which can skew comparisons.
Step 3
Define the term economic growth.
Answer
Economic growth refers to the increase in the output of goods and services in an economy over time, typically measured as the percentage change in Real Gross Domestic Product (GDP). It represents an expansion of economic activity and an improvement in the standard of living for citizens.
Step 4
Discuss possible costs and benefits of economic growth.
Answer
Benefits:
- Increased Employment Opportunities: Growth leads to higher demand for labor, reducing unemployment.
- Improved Government Finances: More economic activity results in higher tax revenues.
- Higher Standards of Living: Increased income fuels better access to goods and services, improving quality of life.
Costs:
- Environmental Degradation: Rapid growth may lead to unsustainable practices impacting the environment.
- Income Inequality: Growth can disproportionately benefit wealthy individuals, exacerbating wealth gaps.
- Inflationary Pressures: Increased demand can lead to price rises if output doesn't keep pace, affecting purchasing power.