Circular Flow of Income Model
What are the sectors in the Year 8 Circular Flow of Income model?
Three sectors
In a command economic system, how is the question what to produce answered?
•The Government decides what goods and services will be produced.
•Goods and services which are important for society will be produced.
•Harmful goods and services will not be produced.
In a market economic system, how is the question what to produce answered?
•Producers will produce what consumers want.
•Producers can influence demand through advertising.
•Not all consumers will afford essential goods and services.
•Harmful yet profitable goods and services will be produced.
Define a mixed economic system.
A system that combines different parts of command and market economies, where economic decision making is made by both government and individuals.
Define taxation.
Taxation is the system where a government takes a portion of income from people and businesses.
Income is a flow from which sector to which sector?
From firms to households
In a command economic system, how is the question how to produce answered?
•Government decides.
•Government chooses labour (workers) over capital (machines) in order to keep unemployment low. What are some examples?
•Technology is often outdated.
In a market economic system, how is the question how to produce answered?
•Producers will choose the most affordable methods to produce to increase profits.
•Producers will often choose capital (machines) over labour (workers) so unemployment may be high.
•New technology is developed as producers want to beat the competition.
Name two countries with mixed economic systems, and state why.
Australia, and virtually any other non-authoritarian nation. If the government and consumers both drive the economy and decision making, it's mixed.
Define government expenditure.
Government expenditure is the system where the government pays for public services like roads, schools, and hospitals, often using taxes paid by the people.
Businesses receive what in exchange for goods and services according to the Circular Flow of Income model?
Businesses (firms) receive consumer expenditure from households
In a command economic system, how is the question for whom to produce answered?
•Everyone earns the same amount of income.
•There are no poor or rich classes – just the working class.
•Everyone can afford goods and services.
•Goods and services are only for people in the country as there is no overseas trade.
In a market economic system, how is the question for whom to produce answered?
•Goods and services are only for those who can afford it.
•Income is not equal – there will be a large gap between rich and poor.
•Only those who work receive an income, and therefore are able to buy goods and services.
How does a mixed economic system answer the three economic questions?
What to produce?
• Decided partly by the government and partly by the consumer.
How to produce?
• Decided partly by the government and partly by the producer.
For whom to produce?
• Decided partly by those with the income (purchasing power) and partly by government.
What is the name of the tax that is paid by all consumers on most purchases?
Goods and Services Tax
What two flows is the Government responsible for in the Circular Flow of Income model?
Taxation and Government Expenditure
Name four characteristics of a command economic system.
•The Government is the only producer - there is no competition in the economy.
•The Government is the only employer.
•The Government owns all businesses.
•There is no competition in the economy.
•Decisions are made based on what is best for the group.
Name four characteristics of a market economic system.
•Economic decisions are made by individuals.
•Every decision is motivated by profit
•The Government is NOT a producer.
•There is a lot of competition in the economy.
•Consumers determine what goods and services are produced based on demand.
•Decisions are based on what is best for the individual.
Why is Australia a mixed economic system?
• The Australian Government makes few economic rules.
• The Australian Government does not own major industries or business.
•Individuals are free to set up and run businesses and to own their own property.
•Competition between sellers (producers) help to keep prices fair for buyers (consumers).
• Producers and consumers are protected by laws and fair court system.
Which area of social welfare spending is usually the highest for the Australian Government?
Aged Assistance Payments
In a command economic system, which sector would be removed from the circular flow of income model?
The firms would be removed, as the government makes all economic decisions in a command economic system
Explain a country that can be defined as working largely under a command economic system, and how you can tell.
Cuba is considered to be working under a command economic system, as the government runs most of the economy, and tightly controls the distribution of goods and services through ration books. This has led to a situation where the few privately owned business opportunities such as rare private restaurants and driving taxis is sought after more highly than traditionally lucrative professions like being a doctor.
Explain a country that can be defined as working largely under a market economic system, and how you can tell.
The United States of America operates largely under a market economic system, where 85-90% of economic output is privately owned. This has led to the infamous situation in the USA where residents are afraid of calling an ambulance or going to the hospital, even for life-threatening injuries, because the health insurance industry is privately owned, and the medical debt people with incur would likely cripple them and their families for life.
Name two advantages and two disadvantages of a mixed economic system.
Advantages:
- There is a large amount of individual freedom
- The government can make sure the economy is moving forward
Disadvantages:
-People may reach a point where they lose incentive to keep improving due to government oversight
-The government can become too large, and people can be in government roles that do not contribute to society.
Which of the these three areas does the government usually spend the most on and why?
-Education
-Defence
-Health
Usually health, as our education system is partially provided by private organisations (such as Catholic or Anglican schools), and we rely largely on alliances and other countries like the United States of America for our defence.