2.4 Flashcards
What are the two sectors economy?
- Households and sellers
- Households own all wealth and resources so provide firms with Capital, land, labour in return for rent and wages. They use this money to buy goods and services produced by firms.
Explain the circular flow of income?
- Money flows in one direction and goods and services and factors of production flow in another.
What is national output?
Value of goods and services flowing from firms to households
What is national expenditure?
- spending by households on goods and services
What is national income?
income paid by firms to households for land ,labor ,capital and enterprise.
Why is the two sector economy too simplified to represent actual economy?
- Government needs to be added as they take money out and add money by spending. If governments spends more than takes away it increases flow of income
- Add financial services who can add money through investment and take away money when consumers save.
- Foreign markets added as they buy British exports and add money to flow but British want to buy foreign so imports take away money from flow.
Explain income and wealth?
- Wealth is a stock of assets while income is flow.
- Wealth is thing people own e.g houses
- Income is the money they receive e.g work, interest from savings.
- Countries with high wealth normally have high incomes
What are injections?
- Monetary additions to the economy
e.g - Government spending
- Investments
- Exports
What are withdrawals?
- Are where money is removed from economy
- Taxes
- Savings
- Imports
When will the economy be growing or shrinking?
- If sum of injections is greater than leakages/withdrawals then the economy will be growing. If withdrawals are bigger than injections that economy is shrinking.
What is at equilibrium?
When injections are equal to withdrawals so National Income stays the same.
What is the equilibrium curves of National output?
- Where AD and AS curves intersect. If either AS or AD shift equilibrium will change. The size depends on size of shift and elasticity of curve which has not moved.
What will a short run in AD cause?
- AD will be downward sloping and AS will be upward
What will a decrease in SRAS cause?
- Higher prices and lower real GDP
What is an example where AD and AS are affected?
- Investment is one example. As firms will be able to produce more if they have more machines this means in the long run disequilibrium caused by shift in AD will be bought back to equilibrium by an in increase in LRAS rather than a fall in AD.
What is the multiplier process?
- An increase in AD caused by an increase in injection (exports ,government spending) can lead to an increase in income
How do you find the final change in income?
- Ratio of final change of income to initial change of injection and multiplied by original injection
What does the initial injection represent?
- Increase in spending will increase income for someone else which leads to further consumption spending.
- If gov create jobs using £100 m gov spending can lead to £90 m spent by those who have jobs and £81m by those who received £90 m.
How is the size of the multiplier determined?
- How much of an increase in income people spend The MPC. Lower leakages higher MPC
How is the multiplier able to work?
- Due to concept of flow. Since one persons spending is someones income. IMF calculated multiplier tends to be 1.5 in long run and 1.6 for developing countries
What is the negative multiplier effect\?
- Can occur where withdrawal from the economy leads to a further fall in income decreasing economic growth and a decline in economy. Therefore governments cuts deficits leafing to a decrease in economy.
Explain the effects of the economy from multiplayer effect?
- growth can occur quicker, any injections lead to a bigger increase in national income. Injections targeted at those with the biggest MPC to increase size of multiplayer.
- ## E.g government want to give money to people with highest MPC. Hard to know effect
What is Marginal Propensity to consume MPC?
- The increase in consumption following an increase in income
What is marginal Propensity to save?
- The increase in savings following an increase in income
What is Marginal Propensity to Tax (MPT)?
- The increase in taxation following an increase in income
What is marginal propensity to import (MPI)?
- The increase in imports following income
What is marginal propensity to withdraw (MPW)?
Increase in leakages following an increase in income
What does MPC focus on?
- Any factor that affects consumption. e.g Change in interest rates
what does a higher MPC mean?
- Bigger the money of income is spent so more money us transferred through circular of flow and less withdrawn
Multiplier formula?
1/(1-MPC)
What two factors determine the size of the increase in AD?
The initial increase in AD and the size of the multiplier.
