Exercises: Economic agents and the circular flow of income

Name the three main economic agents and explain in one sentence what each one does. Give an example from your own life for each one (your family, a firm you know, a government service you use).

Classify these flows into real (things or work that move) or monetary (money that moves): (a) the wage your mother earns; (b) the hours she works; (c) the sandwich you buy in the cafeteria; (d) the $2\ \text{€}$ you pay for it; (e) the taxes a shop pays; (f) the road built by the government.

The diagram shows the circular flow of income between households and firms, but one of the streams is covered with a question mark.

1. a) The covered stream returns from firms to households carrying money: state what it is and where it comes from.
2. b) Explain why we talk about a 'circular' flow: trace with your finger the full journey of $100\ \text{€}$ from a worker's wage until it returns to a firm.

Identify the main economic agent in each scene — household, firm or State — and justify it: (a) a bakery bakes $200$ loaves a day; (b) the council tarmacs a street; (c) grandparents look after their grandchildren in the afternoons; (d) a hairdresser's charges $12\ \text{€}$ per haircut.

Explain the difference between a good and a service and classify: a haircut, a sandwich, a dental check-up, a video game, the maths support class and a hoodie. Add an example of each type that you (or your family) have 'bought' this week.

Match each tax with the public service it helps pay for and explain the chain: VAT (when buying), income tax (from wages), road tax (for the car). Choose one public service you use every week and describe which taxes sustain it.

In the circular flow, households offer their work to firms and receive an income in return. Name the three kinds of income a household can receive (wages, rent from premises, interest on a deposit) and give an example of each from your surroundings.

Explain what role banks play in the circular flow: where they get the money they lend and who they lend it to. Give an example from your neighbourhood of a project that exists thanks to a loan (a refurbished shop, a new workshop).

Aroa's mother is a teacher at a state secondary school. Describe the full circuit: what flow she gives, what flow she receives, where the money for her wage comes from (follow the taxes), and what flows her family generates when spending it at the local supermarket.

Suddenly, all the households in a neighbourhood decide to save half of what they used to spend on leisure (cinemas, cafés, hairdressers). Explain what happens to local firms in the circular flow, what they might end up doing with wages, and why saving that is good for an individual household can cool down the neighbourhood's economy if everyone does it at the same time.

Your school is a state school: nobody pays to study there, but it is not free. Explain who finances it, through which flows (where the money comes from and where it goes), and name two more public services that you use or will use, indicating the tax that supports them.

Mar's family spends $500\ \text{€}$ a month at the neighbourhood supermarket. Follow the money: name three destinations of those euros inside the shop (wages, suppliers, rent, taxes) and explain how part of it returns to other neighbourhood families, completing the circle. What percentage of each euro do you think stays in the municipality? Give reasons for your estimate.

The council raises the waste collection charge by $20\ \text{€}$ a month and, in return, opens a new library with three employees. Trace the flows: what households lose, what the three employees' households gain, and what everyone gains as users. Analyse why some will pay more than they use and why it can still be considered fair.

You can do it on paper and send a photo with your answer.

An artisan ice-cream shop takes $3.000\ \text{€}$ in one summer month. Split that money up, naming each flow: $900\ \text{€}$ to suppliers, $1.200\ \text{€}$ to wages, $300\ \text{€}$ to the rent of the premises, $200\ \text{€}$ to taxes and the rest, profit.

1. a) Calculate the month's profit and explain which economic agent each flow goes to.
2. b) Explain what would happen to the following month's flows if the owner decides to invest the profit in a second freezer (who she pays it to and what new flow will appear in later summers).

'Taxes are theft.' Rebut the sentence using the circular flow: describe three services that person will use today (streets, healthcare, education, rubbish collection) and follow the money from their pocket to the service. Acknowledge which part of the complaint does make sense (controlling spending, transparency) and how it should be phrased.

On a tourist island, $70\ \%$ of the money is moved by visitors in summer. In winter, shops pull down their shutters and many contracts end. Explain with the circular flow what happens to households and firms in November, why the local economy 'has two speeds', and which two ideas could keep the flow turning in winter.

Following the closure of a factory with $80$ workers in a municipality of $5.000$ inhabitants, the local spokesperson states: "It is a tragedy for the $80$ affected families, but the rest of the town's economy will continue functioning normally, as the shops and the town hall do not depend on that private company."

1. a) Use the circular flow of income model to refute the spokesperson's statement: predict the chain of effects that will be triggered in the goods and services market and in the factor market, and explain how it will affect the town hall's tax revenue and public services.
2. b) If the average salary was $1.500\ \text{€}$ per month and families spent $60\ \%$ of it in local shops, estimate the direct monthly loss to local trade and justify why the total economic contraction will end up being greater than that figure (negative multiplier effect).

In an economy in equilibrium, leakages from the circular flow (household savings, taxes) are offset by injections (business investment, government spending). During a crisis, an increase in household precautionary savings and a freeze on business investment are recorded simultaneously.

1. a) Predict what will happen to overall income and employment if leakages exceed injections. Explain, using the circular flow, the so-called "paradox of thrift": why can the collective attempt to save more end up impoverishing society?
2. b) Two economists debate how to respond: one proposes increasing public spending on infrastructure and the other proposes cutting taxes for households. Analyse, using the leakages and injections circuit, the advantages and disadvantages of each proposal and justify which one would revive the economy faster.

At the high school entrepreneurship fair, the AMPA acts as the public sector and a financial institution: it lends $40\ \text{€}$ to each of the $10$ projects and establishes a $5\ \%$ "tax" on sales for the end-of-year trip fund. Halfway through the day, sales freeze: visiting students have spent all their allowance at the first few stalls, and the other teams are accumulating unsold products, fearing they will not be able to repay the loan.

1. a) Use the circular flow model to diagnose the problem: identify precisely which flow (monetary or real) and in which market the bottleneck has occurred, and explain what consequences it will have for the AMPA fund.
2. b) Design two alternative measures to restore the circular flow (one acting on student demand and the other from the school cooperatives or the AMPA) and justify which of them would better prevent project indebtedness.

The largest employer in a municipality, a logistics plant with $150$ workers, announces its closure. The mayor calculates that each plant wage also sustained half another job in the village's shops and services.

1. a) Trace the complete chain of effects on the local circular flow: households, shops, tax revenue and municipal services.
2. b) With the mayor's figure, estimate how many jobs in total are at risk and propose two measures (one short-term, one long-term) to slow the circle's decline.

You can do it on paper and send a photo with your answer.

A council collects $1.000.000\ \text{€}$ a year. $40\ \%$ goes to staff (police, cleaning staff, administration), $25\ \%$ to external services (rubbish collection, parks), $20\ \%$ to infrastructure and $15\ \%$ to culture and sport.

1. a) Calculate the euros of each budget line and explain which agents of the circular flow each one reaches.
2. b) The governing team proposes cutting culture and sport by half to lower taxes by $7,5\ \%$. Analyse what households gain and lose, and take a reasoned stance.

At the school entrepreneurship fair, the stalls collectively sold $2.400\ \text{€}$, but previously had to spend $1.500\ \text{€}$ on supplies purchased outside the school (in neighbourhood shops). In addition, the school collected $600\ \text{€}$ from tickets priced at $1\ \text{€}$, which the leadership team has decided to retain entirely as savings in the school's bank account.

1. a) Analyse the situation from the circular flow perspective: calculate how much money left the school circuit to the outside (leakage to local shops), how much net profit the students retained, and predict what effect the leadership freezing the $600\ \text{€}$ in revenue has on the economic activity of the school community.
2. b) For the next edition, the leadership team is hesitating between two measures: doubling the ticket price to $2\ \text{€}$ or establishing a rule requiring projects to reinvest $25\ \%$ of their profits into purchasing goods and services from other fair projects. Predict the impact of each option on the circular flow and reasonably argue which one is preferable.

'The State should spend more than it collects when the country's economy cools down, to reactivate the flow.' Going into debt in bad times sounds odd.

1. a) Explain with the circular flow why extra public spending in a crisis can 'restart' the circle (wages, purchases, tax revenue coming back).
2. b) Analyse the risks of that prescription if it is always used, and how it differs from a household taking out a loan, using two concrete differences.

Design your class's 'economic scale model': turn the way your project group works into a circular flow with its agents (team, student-customers, school-State, PTA-bank). Define what 'work' is, what 'income' is, what 'tax' you would charge and for which fund, and explain what lesson about the real economy drawing it like this teaches you.