2.4 Flashcards
Explain whats meant by the circular flow of income
A way of analysisng the flows of money around an economy between households and firms
It accounts for injections that increase the circular flow of income (investment gov spending exports)
It also accounts for withdrawls that decrease the circular of income (saving taxation imports)
Explain the difference between income and wealth
Income is what you earn, wealth is the value of what you own
Define the multipier effect
The process by which a change in an interjection (gov expenditure, investment or exports) causes a more than proportionate change in national income
Whats the multiplier formula
k=1/1-mpc
Define th term ‘marginal propensity to consume’ MPC +formula
The proportion of an increase in income thats spent
MPC= change in concumption (C) / change in income (Y)
Explain how changes in the MPC will affect the multiplier
The higher the value of the MPC, the higher will be the value of the multiplier and consequently the greater will be the impact of an interjection on GDP. Using the MPC, the multiplier is calculated by K= 1/1-mpc
Defince the term ‘marginal propensity to save’ MPS
The proportion of an increase in income thats saved
MPS= change in Saving/ Change in income (s/Y)
Define the term marginal propensity to tax MPT
The proportion of an increase in income thats taxed
MPT= change in tax/ chnage in income (T/Y)
Define the term marginal propensity to import MPM
+equation
The proportion of an increase in income that is spent on imports
MPM= change in imports/ change in income (M/Y)
Define the term marginal propensity to withdraw MPW
The proportion of an increase in income that is spent on withdrawls
MPW= Change in withdrawls/ change in income (W/Y)
Explain how MPW, MPS, MPT and MPM will affect the multiplier
The higher the vale of the MP, the lower the value of the multiplier. This means that any change in an injection has a smaller impact on the overall level of spending
K=1/1-MPW fore example
What is an interjection + 3 examples
Injection into the circular flow is spending which does not come from households
Investment, Gov spending and exports
How does investment increase the circular flow of income? + What might lead to a rise in the amount of each injection?
Spending by businesses on capital
Investment creates jobs and provides incomes for households to spend
Higher profits (eg lower corp tax)
Lower interest rates
Greater business confidence
How does Gov spending increase the circular flow of income? + What might lead to a rise in the amount of each injection?
Spending by central + local gov
Gov spending can be transfers (like benefits) which creates spending power for households. It can also be spent on education, healthcare ect creating jobs
Expansionary Fiscal policy
A shift from a more free market Gov to a more interventionist Gov
How does exports increase the circular flow of income? + What might lead to a rise in the amount of each injection?
Spending by foreign consumers on domestic goods+ services + extra spending on domestic goods created greater profits + requires greater production levels which creates jobs
£weaker
Uk more competitive/ more desireable
Low inflatiom
How does saving reduce the circular flow of income? + What might lead to a rise in the amount of each withdrawal?
Money which isn’t spent by households
Saving reduces the amount of money spent by households- this reduces revenues/ profits for firms
Higher interest rates
Lower consumer confidence
How does taxation reduce the circular flow of income? + What might lead to a rise in the amount of each withdrawal?
Paid to the gov by households + firms
Taxation removes money from circular flow of income - income tax reduces disposable income whilst corporation tax reduces net profits
An aim to reduce a budget deficit might involve higher taxes
A shift from a more free market government to a more interventionist government is likely to increase taxation (but also spending)
How does imports reduce the circular flow of income? + What might lead to a rise in the amount of each withdrawal?
Spending by households + firms on goods + services from abroad.
Money spent leaves the domestic flow of income
Less tarifs + trade barriers
If UK is less competitive (UK has high inflation)
Explain how the multiplier effect can have an impact on the future GDP of an economy
One persons spending becomes another persons income. When the Gov increase spending that money becomes public service workers income. This was respent to become revenue for businesses ect, the respending only stopped when it leaked out from taxes, savings and imports
Explain how a negative multiplier effect could lead to a ‘downward spiral’ for an economy
When there is more withdrawels, there is less spending thus less revenue which leads to less jobs in the ecconomy thus causing further less spending.
