Exercises: 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.

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.

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

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.

Ana earns $\$100$ on her payslip for working at a butcher shop and spends it entirely at a local supermarket. The supermarket owner claims: "That money does not leave the economy: the $\$100$ that the butcher shop paid in the factor market will turn entirely into wages for other workers in the next round, generating an infinite chain without any leakages".

1. a) Refute the owner's claim by modelling the journey of those $\$100$ through the circular flow of income: identify the economic agents involved, the markets (goods and factor markets) they move through, and the correspondence between real and monetary flows.
2. b) Justify which decisions made by the agents introduce "leakages" into subsequent links of the chain, and interpret what would happen to local income and economic activity if consumers decided to divert that spending towards international e-commerce platforms.

The government grants a subsidy to Mexican film production companies.

1. a) Trace the effect of this injection in the circular flow: initial recipient, subsequent links and possible knock-on multiplier effect.
2. b) Through which channels does part of this money "return" to the government? Explain at least two ways.

During a recession, a country records a $4.5\,\%$ drop in its GDP, reflecting a notable decline in monetary exchanges within the circular flow. However, living conditions surveys show that the material well-being and consumption of many households barely deteriorated, thanks to an increase in unpaid domestic care and repairs, home vegetable gardens, and bartering of goods and services among neighbors.

1. a) Critically analyse this paradox based on the limitations of the traditional circular flow model: justify which real and factor transactions remain invisible when measuring the economy solely through monetary flows, and what risks are involved in designing public policies based exclusively on that measurement.
2. b) Design a conceptual or graphical adaptation proposal for the circular flow diagram that integrates both unpaid domestic work and informal activities, justifying how these flows relate to households and firms in the formal circuit.