2.1 The Circular Flow Of Income Flashcards
National income definition
Total value of the goods and services are country producers over a time period
What are the three ways national income can be calculated
- expenditure method
- income method
- output method
What is expenditure method
This involves adding up all the spending over a period of time (aggregate demand)
What is income method
Adding up all incomes and over a period of time
What is output method
This measure the value of output produced by industries
Why should you be careful when using the output method?
Be careful not to double count
e.g. the output of the steel industry may be used in the production of cars and that should only appear once
What do the three methods state?
National income = national expenditure = national output
Consumption definition
Spending by households on goods and services
Investment definition
Spending by firms on capital goods
Nominal national income definition
National income unadjusted for changes in price (the price operating in the year the output is produced)
Real national income equation
price level that year
Nominal NI x ————————
Price level current year
Economic growth equation
New RNI - Old RNI
———————— X 100
Old RNI
Uses of real national income
- measures how successful the economy is
- shows how well of the population is, by RNI per capita
- government can estimate taxation to be collected
Circular flow of income definition
A model of the economy where income and spending flows between households and firms
Injections definition
Extra money placed into the circular flow of income in the form of investment, exports and government expenditure
