2:3:1 - National Income Flashcards
Describe the circular flow of income model.
– Just households and firms in the economy – households own all the factors of production (land, labour, capital and enterprise)And the firms are producers Money moves from households to firms when goods and services are bought. – Money moves back to household as payment for the use of factors of production.
What is meant by the term circular flow of income?
Money circulates from households to firms and back again.
What increases the amount of income in the circular flow?
– The more that household spend – the more the firms produce
What is meant by the term wealth?
Is the sum of all the assets in the economy
In the UK what is most wealth held as?
The form of housing (60%)
Wealth is a stock concept, what does this mean?
– Means the wealth does not have a direct impact on circular flow of income, but changes in wealth have an affect on incomes and spending.
What is meant by the term wealth affect?
The effect on incomes or spending when asset values change
Is income flow concept?
Yes
How can the wealth affect and the circular flow of income be linked?
If an asset increases in value you might feel more confident about spending in the economy (the world affect) and your Increased spending all then become part of the circular flow of income
What are the three different types of injections into the circular flow of income called?
– Investment (I) – government spending (C) – exports (X)
The three different types of injections into the circular flow of income can be magnified by what?
Multiplier
What is meant by the term injections?
Flows into the circular flow of income.
What is meant by the term withdrawls ?
Flows out of the circular flow of income
What can withdrawals from the circular flow of income also be called?
Leakages
What are the three different types of withdrawals from the circular flow of income?
– Savings (S) – tax (T) – import (M)
How does saving affect the circular flow of income?
Saving means there is less money in the economy
How does tax affect the circular flow of income?
The government takes money away from the economy in the form of tax, And does not spend it there is less money in the circular flow.
How does imports affect the circular flow of income?
If people buy more things from abroad and they export economy slows down as many leaves the circular flow
The three withdrawals (leakages effectively determine the size of what?
The multiplier
If all the injections equal all the withdrawals (leakages) then the economy will be in what?
Equilibrium
If injections are greater than with drawers (leakages the economy will what?
Economy will grow
If leakages (with drawls are greater than injections the economy will what?
Economy will contract
When aggregate demand meets aggregate supply there is what?
And equilibrium point
When aggregate demand meets aggregate supply there is an equilibrium point, what does this equilibrium point tell us?
Tells us the price level and real GDP of the country
Prices were higher than the new equilibrium (Where I can get demand equals aggregate supply) there would be a tendency for what?
There would be a tendency for prices therefore because supply will be greater than demand and there would be lots of unsold goods and services
If prices were lower than the new equilibrium (when a good demand equals aggregate supply) there would be what?
– I would be shortages – Prices would start to rise, rules of supply and demand
What is meant by the term multiplier ratio (multiply)?
when an initial injection into the economy causes a bigger final increase in national income.
What is the most important factor in determining the size of the multiplier?
The size of the withdrawals from the circular flow - what proportion of the additional income is saved by households - What proportion is spent on imported goods - What proportion is paid to the government in the form of taxation
The multiplier is inversely proportional to what?
The marginal propensity to withdraw (MPW)
Because the Multiplier is inversely proportional to the Marginal propensity to withdraw, the equation for the multiplier is…
1 / MPW
What is meant by the term marginal propensity to withdraw (MPW)?
A measure of how much of any extra pound earned is saved, taxed or spent outside the economy
How can you calculate the marginal propensity to withdraw (MPW)?
Marginal propensity to save (MPS) + Marginal propensity to tax (MPT) + Marginal propensity to import (MPM)
How can the formula for the multiplier also be written as? (Including MPC)
1/(1 - MPC)
What does MPC stand for
Marginal propensity to consume
What is the importance of the multiplier?
– If there is any change in spending in an economy – final impact on incomes will be greater than the initial impact
What happens to the multiplier when leakages from economy occur?
Smaller Multiplier
What is the size of the multiplier in the UK?
1.4
Is the size of the multiplier in developing countries greater than the multiplier in the UK?
Yes
How will a large value of the multiplier affect aggregate demand?
It will cause greater shift in aggregate demand
What is meant by the term marginal propensity to consume (MPC)?
how much of any extra pound earned is spent within the economy
Diagram showing the circular flow of income.
