Economic agents and the circular flow of income

Name the three main economic agents and explain in one sentence the role of each in the economy. Give an example of each taken from your everyday surroundings.

What is the factors of production market within the circular flow? Explain who supplies and who demands labour in it, and give an example of a factor other than labour (rented premises, lent capital) with its corresponding market.

Topic challenge. The factors of production are labor, capital and land (or natural resources). Each one receives a different income: wages, interest or profits, and rent (or land rent).

1. a) Match each factor of production with the income that corresponds to it.

1. b) Give a real example, from your town or your surroundings, of each of these incomes (a wage, an interest or profit, and a rent).

What will be assessed: that the matching between factor and income is correct, and that each example is realistic and clearly corresponds to the factor of production it belongs to.

Distinguish between real flows and monetary flows, and classify the following: a checkout assistant's work, their salary, the purchase of a computer by a firm, and the bread bought by a household.

The figure shows the circular flow of income between households and firms, with four labelled flows.

1. a) Identify which flows are real and which are monetary.
2. b) Explain why the circuit can be viewed as a circle: where does the money "start" and where does it "end"?

Two markets appear in the circular flow: the goods and services market and the factor market.

1. a) Explain who supplies and who demands in each of these markets.
2. b) Place in the corresponding market: renting premises, a payslip, and a supermarket purchase.

Distinguish consumption, investment and public spending within an economy's total spending, and classify: a household buys a washing machine, a bakery buys an industrial oven and the government builds a health centre. Which of the three increases future productive capacity?

What is the foreign sector in the circular flow? Explain how flows enter and leave a country's circuit through exports and imports, with an example of each (selling oranges abroad, buying oil abroad).

What role does the government play in the circuit? Explain where public money "enters" and "exits", mentioning taxes, public spending and public services.

In the circuit, household saving is a "leakage" and firms' investment is an "injection". Explain what each term means using the analogy of a water circuit: where does the water leave and where does it come back in?

Households in a country decide to save a much larger share of their income.

1. a) Explain what "leakage" the circuit suffers and what immediate effect it has on firms.
2. b) What "injection" could offset this leakage? Reason your answer.

A fictitious economy presents the following annual macroeconomic data (in billions of euros):

• Private savings ($S$) = $200$

• Business investment ($I$) = $250$

• Net taxes ($T$) = $300$

• Government spending ($G$) = $280$

• Imports ($M$) = $150$

• Exports ($X$) = $100$

1. a) Classify the variables into leakages and injections of the circular flow, calculate the net balance between both, and make a reasoned prediction about the trend that national production (income) and the level of employment will experience if no exogenous changes occur.
2. b) In view of this situation, the Government proposes to increase government spending ($G$) up to $320\ \text{billion}$ to correct the gap, claiming that "the increase in economic activity will automatically balance the public deficit and the external sector." Critically evaluate this statement: calculate the State's new budget balance ($G - T$), the trade balance ($X - M$), and justify what macroeconomic imbalances would be accumulating in the circular flow.