10.1 The Circular Flow Of Income Flashcards
What does national income measure?
Flow of net output produced by an economy in a particular time period such as a year
What is the difference between nominal and real national income?
The flow of new output is real national income which comprises the actual goods and services that are produced, by contrast nominal national income measures the flow of output at the current price level in the economy
What is the role of real national income as an indicator of economic performance?
The level of real national income is an indicator of current living standards within the economy and it’s rare of change measures the economic growth occurring in the economy. The level and rate of change of real national income are used when comparing a countries economic performance with other countries
National income=
National output=national expenditure
How many methods are used to measure the flow or new output in an economy?
3
What are the 3 methods are used to measure the flow or new output in an economy?
- Adding together incomes received by different factors of production (income approach)
- Summing the totals of actual goods and services produced by the economy (output approach)
- Messier national expenditure(expenditure approach)
What is the estimate of gdp based on?
The output approach to measuring the flow of new output
What is a closed economy?
An economy with no international trade
What do households do in the supply of labour?
Supply labour and purchase goods
What are savings?
Incomes that aren’t spent
What is withdrawal?
Leakage of spending power out of the circular flow of income into savings, taxation or imports
What is investment
Total planned spending by firms on capital goods produced in the economy
What is injection?
Spending entering the circular flow of income as a result of investment gov spending and exports
What is equilibrium national income ?
Level of income at which withdrawals from the circular flow of income equal injections into the flow ; also the level of output at which AS=AD
What is full employment income?
The level of income when the economy is producing on its PPF with no spare capacity
What does savings to do AD
Lead to deficient AD-firms reduce output and national income falls
Is equilibrium national income the same as full employment income ?
No
How does savings in bank not lead to reduced AD and real national income
Planned savings May equal planned investment
National income remains in equilibrium and there is no reason why the price level should fall
In the two-sector circular flow model when is national income equilibrium achieved
Planned savings =planned investment
What is an open economy
An economy open to international trade
What are injections in the economy
Exports
Gov spending
Investment
What are withdrawals in the economy
Saving
Taxation
Imports
What happens to national income level when withdrawals> injections
National income falls
What happens to national income level when Withdrawals< injections
National income rises
What is the risk if planned savings > planned investment
Economy could sink into a recession
What do free market economists think about deficient AD?
Only exists as a temporary self-correcting phenomenon
They are that when it occurs the rate of interest falls restoring equality between savings and investment
What does the Philips machine do?
Can predict the running of the national economy within 4% accuracy
