02 Circular Flow of Income and Macroeconomic Objectives Flashcards
Define the Circular Flow of Income.
Shows connections between different sectors of the economy. It revolves around flows of goods and services and factors of production between firms and households.
What are injections?
Extra money placed into the circular flow of income.
What are withdrawals?
Money taken out of the circular flow of income (also known as leakages)
What are the 3 injections?
- Investment
- Exports
- Government spending
What are the 3 withdrawals?
- Taxation
- Imports
- Saving
When does macroeconomic equilibrium occur in the circular flow of income model?
If there is no pressure on national income to rise or to fall.
When does national income increase?
I + G + X > S + T + M: When there are more injections
When does national income decrease?
I + G + X < S + T +M: When there are more withdrawals
When is there macroeconomic equilibrium?
I + G + X = S + T + M: When injections equal withdrawals
What are the 3 ways to measure GDP?
- Output
- Income
- Expenditure
- Any of the 3 should theoretically give the same answer
If withdrawals are greater than injections, the economy will…
suffer declining incomes, output and expenditure.
Lower incomes will reduce the levels of…
taxation and saving, causing withdrawals to shrink until they equal injections.
If injections are greater than withdrawals, the economy will…
expand.
When the economy is growing, households and firms will pay…
more tax, and are also likely to save more.
Define income.
A flow of money which acts as a reward for the services of factors of production.
Define wealth.
The stock of assets held by an individual or organisation.
Give examples of income.
- Wages
- State pension
- Dividends
- Interest
Give examples of wealth.
- Shares
- Bank savings
- Gold
- House
What is an example of gaining income from wealth?
Dividends from shares.
What is an example of gaining wealth from income?
Those on high income can afford to build up their wealth over time by buying up shares.
What is the link between income and wealth?
They have a positive correlation, meaning that citizens tend to either have high levels of income and wealth or low levels of income and wealth.
What is the counter-argument to the idea that income and wealth have a positive correlation?
- It depends on how much income wealth is generating
- There may be a time lag
- Redistribution policies could reduce inequalities in income and wealth
Define the multiplier effect.
When an initial change in injections/withdrawals to the circular flow of income leads to a greater final change in real GDP/national income.
What is the Marginal Propensity to Consume? Give an example.
Measures the proportion of extra income that is spent on consumption - e.g., if an individual gains an extra £10, and spends £7.50, then the MPC will be 7.5/10 = 0.75
