Question

Using the circular flow of income model, supported by a diagram, show the effect on an economy such as the UK, of a fall in investment by British firms and a reluctance by Chinese companies to buy goods from the UK.

Word Limit: 200 words

Answer 1

In a strong and developed economy of a country like UK, following the circular model of income if the investment of the British firms falls in the market and the economy, the whole circular model would suffer and face consequences about the same. Investments are the example of injection where the money is put into the economy for the consumption and usage purposes. If the same money or investment which is being put by the British firms decrease, the banks or the other financial instituitions or companies wouldn't have the money to carry out the business. This would affect their productivity and again the labour where their income level would decrease. This would affect the saving level and thus the whole economy and the participants would face shortage of money because inevstment level is is decreased.

If the chinese firms are hesitating in buying goods from UK, that would again lead to export / import differences and also the economic disturbance in UK. The money from the foriegn investment by the world economic levels through the globalisation would decrease, ae China wouldn't pay much orders to produce and wouldn't pay money into the UK economy for the production. This would cause the foreign income to decrease and costs to increase. The factor payment from abroad woukd be affected making again the evonomic level of UK suffer and go from the money matters in the working of the cyclic flow of income model.